Healthcare Dashboard - Update
Summary
- Valuation metrics in the healthcare sector.
- Evolution since last month.
- A list of stocks looking cheap in their industries.
- Members of my private investing community, Quantitative Risk & Value, receive access to my breaking news coverage of this idea. Get started today >>
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 2 out of 3 valuation metrics. However, profitability measured in return on equity is below the historical baseline. Healthcare providers and healthcare technology look moderately overpriced and close below their historical averages in profitability. Life science tools/services are significantly overpriced. Combining all metrics, healthcare equipment and pharmaceuticals are the less attractive groups. However, pharmaceuticals show a good price to free cash flow among other bad ratios.
Anyway, I think systemic risk is more important than market valuation to manage a portfolio (click here to learn more about it).
Since last month:
P/E has improved in all healthcare industries except a minor deterioration in pharmaceuticals.
P/S has improved in biotechnology, is stable in pharmaceuticals and deteriorated elsewhere.
P/FCF has improved in biotechnology, pharmaceuticals, healthcare providers and deteriorated elsewhere.
ROE is stable in biotechnology, life science tools/services and deteriorated in healthcare technology, providers, pharmaceuticals.
In 1 trailing month, the Health Care Select Sect SPDR ETF (XLV) and the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) have outperformed the SPDR S&P 500 ETF by almost 3%, whereas the SPDR Biotech ETF (XBI) has lagged the benchmark by 4.8%.
The five best performers among S&P 500 healthcare stocks in this period are Biogen Inc. (BIIB), HCA (HCA), Illumina, Inc. (ILMN), IQVIA Holdings Inc. (IQV), Eli Lilly and Co. (LLY).
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.
AbbVie Inc. | BIOTECH | |
Biogen Inc. | BIOTECH | |
Celgene Corp. | BIOTECH | |
MiMedx Group Inc. | BIOTECH | |
United Therapeutics Corp. | BIOTECH | |
Cardinal Health Inc. | HCAREPROVID | |
Express Scripts Holding Co. | HCAREPROVID | |
Select Medical Holdings Corp. | HCAREPROVID | |
Mallinckrodt Plc. | PHARMA | |
Prestige Brands Holdings Inc. | PHARMA |
Detail of valuation and quality indicators in healthcare on 8/2/2018
I take 4 aggregate industry factors: 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 | 62.68 | 27.18 | -130.61% | 5.15 | 3.18 | -62.10% | 59.33 | 30.51 | -94.47% | -38.72 | -12.14 | -26.5789 |
Healthcare Providers | 22.78 | 20.88 | -9.11% | 1.07 | 0.85 | -25.67% | 22.76 | 17.75 | -28.22% | 0.82 | 5.78 | -4.9552 |
Healthcare Technology* | 58.98 | 56.13 | -5.08% | 4.12 | 3.39 | -21.57% | 56.49 | 35.77 | -57.91% | -13.35 | -6.2 | -7.151 |
Biotechnology | 27.27 | 39.78 | 31.45% | 37.05 | 29.01 | -27.71% | 30.67 | 43.74 | 29.89% | -77.15 | -64.42 | -12.7336 |
Pharmaceuticals | 34.81 | 26.26 | -32.54% | 23.80 | 8.25 | -188.46% | 17.76 | 32.55 | 45.45% | -84.51 | -30.3 | -54.2127 |
Life Sciences Tools/Services* | 49.69 | 29.52 | -68.34% | 4.84 | 3.39 | -42.74% | 46.35 | 27.28 | -69.90% | -19.95 | -18.37 | -1.581 |
* 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, XBI, IBB with the benchmark in 1 month.
Chart by TradingView
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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 BIIB, CELG, XBI. 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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