Valuation Dashboard: Healthcare - Update
Summary
- Valuation metrics in the Healthcare sector.
- Evolution since last month.
- A list of stocks looking cheap in their industries.
This article series provides a monthly dashboard of industries in each sector of the GICS classification. It compares valuation and quality factors relative to their historical averages.
Executive Summary
Biotechnology is undervalued regarding historical averages in Price/Earnings and Price/Free Cash Flow, but profitability measured in median ROE is below its historical baseline. Healthcare Providers and Healthcare Technology are moderately overpriced. The former group is just at its historical average in profitability, the latter is below it. Healthcare Equipment has all metrics far below the baseline. Life Science Tools/Services are also far in overpriced territory, but their profitability factor is at its historical average. Data are mixed for Pharmaceuticals: P/FCF is good, P/E is moderately overpriced, P/S and ROE are very bad.
Anyway, I think systemic risk is more important than market valuation to manage a portfolio.
Since last month:
P/E has improved in Healthcare Technology, Life Science Tools/Services; no significant change elsewhere.
P/S has improved in all industries, the most in Biotechnology.
P/FCF has improved in all industries, the most in Life Science Tools/Services.
ROE has deteriorated in Healthcare Equipment and Providers; no significant change elsewhere.
In 1 trailing month, the Nasdaq Biotechnology ETF (NASDAQ:IBB) has lagged the SPDR S&P 500 ETF (SPY) by about 3.5%. The SPDR Select Sector Healthcare ETF (NYSEARCA:XLV) and the S&P 500 Pharmaceuticals ETF (XPH) have lagged the broad market benchmark by less than 1%.
The five best performers among S&P 500 Healthcare stocks on this period are Allergan PLC (AGN), Boston Scientific Corp. (BSX), Centene Corp. (CNC), Humana Inc. (HUM).
Some Cheap Stocks In Their Industries
The stocks listed below are in the S&P 1500 index, cheaper than their respective industry factor for Price/Earnings, Price/Sales, and Price/Free Cash Flow. The 10 companies with the highest Return on Equity are kept in the final selection. Quantitative Risk & Value Members have an early access to the stock lists every month before they are published in free articles. Click here to read about performances. This is not investment advice. Do your own research before buying.
Celgene Corp. | BIOTECH | |
Eagle Pharmaceuticals Inc. | BIOTECH | |
MiMedx Group Inc. | BIOTECH | |
AmerisourceBergen Corp. | HCAREPROVID | |
Cardinal Health Inc. | HCAREPROVID | |
Express Scripts Holding Co. | HCAREPROVID | |
Humana Inc. | HCAREPROVID | |
McKesson Corp. | HCAREPROVID | |
Mallinckrodt Plc | PHARMA | |
Prestige Brands Holdings Inc. | PHARMA |
Detail Of Valuation And Quality Indicators In Healthcare On 4/3/2018
I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.
For each factor, I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).
The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average ("Avg") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above ("D-xxx").
P/E | Avg | D- P/E | P/S | Avg | D- P/S | P/FCF | Avg | D- P/FCF | ROE | Avg | D-ROE | |
Healthcare Equipment | 53.41 | 27.18 | -96.50% | 4.21 | 3.18 | -32.39% | 48.41 | 30.51 | -58.67% | -35.28 | -12.14 | -23.14 |
Healthcare Providers | 20.88 | 20.88 | 0.00% | 1.07 | 0.85 | -25.88% | 19.71 | 17.75 | -11.04% | 5.65 | 5.78 | -0.13 |
Healthcare Technology* | 60.52 | 56.13 | -7.82% | 2.93 | 3.39 | 13.57% | 35.8 | 35.77 | -0.08% | -13.56 | -6.2 | -7.36 |
Biotechnology | 30.15 | 39.78 | 24.21% | 35.33 | 29.01 | -21.79% | 23.81 | 43.74 | 45.56% | -79.94 | -64.42 | -15.52 |
Pharmaceuticals | 32.26 | 26.26 | -22.85% | 20.03 | 8.25 | -142.79% | 18.3 | 32.55 | 43.78% | -64.38 | -30.3 | -34.08 |
Life Sciences Tools/Services* | 47.81 | 29.52 | -61.96% | 4.02 | 3.39 | -18.58% | 35.44 | 27.28 | -29.91% | -18.5 | -18.37 | -0.13 |
* Averages since 2006
The following charts give an idea of the current status of 3 valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors, the difference to average is calculated in the direction where positive is good. For valuation ratios, lower is better. For ROE, higher is better. On the charts below, higher is always better.
Price/Earnings relative to historical average:
Price/Sales relative to historical average:
Price/Free Cash Flow relative to historical average:
ROE relative to historical average:
Momentum
The next chart compares the price action of XLV, XPH, IBB with SPY in 1 month.
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Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).
This article was written by
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I am an individual investor and an IT professional, not a finance professional. My writings are data analysis and opinions, not investment advice. They may contain inaccurate information, despite all the effort I put in them. Readers are responsible for all consequences of using information included in my work, and are encouraged to do their own research from various sources.
Analyst’s Disclosure: I am/we are long CELG, ESRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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