Healthcare And Biotechnology Dashboard - Update

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About: iShares Nasdaq Biotechnology ETF (IBB), XLV, Includes: ABC, ALGN, AMGN, BIIB, CELG, CERN, CORT, EW, EXEL, ILMN, LNTH, NKTR, REGN, SUPN, WCG, 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 significantly underpriced relative to historical averages combining 3 valuation ratios, but the profitability metric is below the historical baseline. Ratios are mixed for pharmaceuticals: price/earnings is good relative to the historical average, price/free cash flow is excellent, but price/sales and return on equity are very bad. Other healthcare industries are overvalued by at least 20% and much more for some of them. Combining all metrics, healthcare equipment is the worst-looking group in the sector. Life science tools/services is the only healthcare industry above its profitability baseline, but it is also the second worst one in valuation.

Since last month:

  • P/E has improved in biotechnology and pharmaceuticals, and deteriorated in healthcare technology, equipment and life science tools/services.

  • P/S has improved in biotechnology and pharmaceuticals, is stable in life science tools/services, and deteriorated elsewhere.

  • P/FCF has improved in biotechnology and pharmaceuticals, is stable in healthcare equipment, and deteriorated elsewhere.

  • ROE is stable in pharmaceuticals and life science tools/services, and deteriorated elsewhere.

  • In 1 trailing month, the Health Care Select Sect SPDR ETF (XLV), the SPDR Biotech ETF (XBI) and the iShares Nasdaq Biotechnology ETF (IBB) have lagged the SPDR S&P 500 ETF by 5% to 6.2%.

  • The five best performers among S&P 500 healthcare stocks on this period are Align Technology Inc. (ALGN), Cerner Corp. (CERN), Edwards Lifesciences Corp. (EW), Illumina Inc. (ILMN), and WellCare Health Plans Inc. (WCG).

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. This is not investment advice. Do your own research before buying.

AMGN

Amgen Inc.

BIOTECH

BIIB

Biogen Inc.

BIOTECH

CELG

Celgene Corp.

BIOTECH

EXEL

Exelixis Inc.

BIOTECH

REGN

Regeneron Pharmaceuticals Inc.

BIOTECH

LNTH

Lantheus Holdings Inc.

HCAREEQSUPP

ABC

AmerisourceBergen Corp.

HCAREPROVID

CORT

Corcept Therapeutics Inc.

PHARMA

NKTR

Nektar Therapeutics

PHARMA

SUPN

Supernus Pharmaceuticals Inc.

PHARMA

Detail of valuation and quality indicators in healthcare on 4/15/2019

I take 4 aggregate industry factors: price/earnings (P/E), price to sales (P/S), price to free cash flow (P/FCF), and 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

48.21

27.18

-77.36%

4.88

3.18

-53.50%

51.89

30.51

-70.09%

-45.36

-12.14

-33.22

Healthcare Providers

25.54

20.88

-22.33%

1.17

0.85

-37.27%

19.70

17.75

-10.99%

0.39

5.78

-5.39

Healthcare Technology*

68.35

56.13

-21.77%

5.29

3.39

-56.05%

58.62

35.77

-63.87%

-26.43

-6.2

-20.23

Biotechnology

26.84

39.78

32.54%

30.49

29.01

-5.10%

27.00

43.74

38.27%

-84.95

-64.42

-20.53

Pharmaceuticals

22.36

26.26

14.87%

19.73

8.25

-139.20%

16.65

32.55

48.83%

-85.74

-30.3

-55.44

Life Sciences Tools/Services*

43.75

29.52

-48.19%

5.67

3.39

-67.18%

42.78

27.28

-56.81%

-8.67

-18.37

9.70

* 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 and IBB with the benchmark in 1 month.

Chart by TradingView

Disclosure: I am/we are long XBI,BIIB,CELG. 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.