Healthcare And Biotechnology Dashboard - Update

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About: Health Care Select Sect SPDR ETF (XLV), IBB, Includes: A, ABBV, BAX, CELG, CORT, ESRX, EXEL, LGND, LLY, MNK, NKTR, PBH, REGN, RMD, SEM, XBI
by: Fred Piard
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 looks underpriced regarding the historical averages of its valuation ratios. However, profitability measured in return on equity is below the historical baseline. Healthcare providers look moderately overpriced. Other healthcare industries are significantly overpriced. Metrics are mixed for pharmaceuticals: price/earnings is fair, price/free cash flow looks great, but price/sales and return on equity ratios are very bad. Combining the metrics reported here, healthcare equipment is the worst industry in the sector. All industries except life science tools/services are below their profitability baseline. 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 industries except in biotechnology (deteriorated) and life sciences tools/services (stable).

  • P/S has improved in all industries.

  • P/FCF has improved in all industries except healthcare providers (stable).

  • ROE has improved in healthcare providers, healthcare technology and deteriorated in biotechnology, healthcare equipment.

  • In 1 trailing month, the SPDR Select Sector Healthcare ETF (XLV), the Nasdaq Biotechnology ETF (IBB) and the SPDR Biotech ETF (XBI) have outperformed the SPDR S&P 500 ETF by 2.7%, 2.8%, and 4.9%, respectively.

  • The five best performers among S&P 500 healthcare stocks on this period are Agilent Technologies Inc. (A), Baxter International Inc. (BAX), Eli Lilly and Co (LLY), Regeneron Pharmaceuticals Inc. (REGN), Resmed Inc. (RMD).

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 (excluding extraordinary items), 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.

ABBV

AbbVie Inc.

BIOTECH

CELG

Celgene Corp.

BIOTECH

EXEL

Exelixis Inc.

BIOTECH

LGND

Ligand Pharmaceuticals Inc.

BIOTECH

ESRX

Express Scripts Holding Co.

HCAREPROVID

SEM

Select Medical Holdings Corp.

HCAREPROVID

CORT

Corcept Therapeutics Inc.

PHARMA

MNK

Mallinckrodt Plc

PHARMA

NKTR

Nektar Therapeutics

PHARMA

PBH

Prestige Consumer Healthcare Inc.

PHARMA

Detail of valuation and quality indicators in healthcare on 12/11/2018

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

53.39

27.18

-96.44%

4.65

3.18

-46.20%

51.07

30.51

-67.38%

-37.33

-12.14

-25.19

Healthcare Providers

22.82

20.88

-9.27%

1.00

0.85

-17.80%

18.26

17.75

-2.86%

1.90

5.78

-3.88

Healthcare Technology*

50.83

56.13

9.45%

4.44

3.39

-31.00%

55.11

35.77

-54.06%

-11.99

-6.2

-5.79

Biotechnology

32.51

39.78

18.26%

30.44

29.01

-4.93%

27.94

43.74

36.12%

-80.62

-64.42

-16.20

Pharmaceuticals

24.85

26.26

5.35%

23.00

8.25

-178.74%

14.44

32.55

55.64%

-82.71

-30.3

-52.41

Life Sciences Tools/Services*

53.57

29.52

-81.48%

4.68

3.39

-38.16%

34.48

27.28

-26.38%

-7.63

-18.37

10.74

* 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

Disclosure: I am/we are long ABBV, 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.