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IHI: COVID-19 Will Harm The Medical Device Industry

Harrison Schwartz profile picture
Harrison Schwartz


  • Despite extreme valuations, medical device companies have all-time-high valuations and exuberant investor sentiment.
  • Most analysts expect COVID-19 to slow the long-term EPS growth for most medical device companies.
  • The decline in elective procedures and increase to hospital bankruptcies will lower demand for expensive medical technology.
  • IHI's relative performance and relative fundamentals signal a high probability of negative alpha over the coming 1-2 years.
  • IHI appears to be a solid short opportunity, potentially overvalued by 50%.
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Last year, I wrote "IHI: Medical Device Bull Market To End Soon," which detailed the fund's high valuation and the decline in its long-term bullish fundamental trend. Since then, the iShares U.S. Medical Devices ETF (NYSEARCA:IHI) is about 10% higher, having risen with equities as a whole, but it did decline a staggering 33% peak-to-trough during the March crash.

The ETF is now back near its all-time high and has seen significant inflows over the past few months. The valuations of its holdings have reached extreme levels despite the fact that many of its constituent firms will see a large earnings slowdown this year due to a decline in elective producers.

The primary goal of my previous article was to highlight the lack of opportunity for investors in IHI. Now I believe the fund has become a solid short trade as numerous downside catalysts have appeared. Additionally, the ETF has seen a decline in relative momentum compared to benchmark index funds, which imply it is headed for secular decline.

COVID-19 Has Led to a Decline in Growth Estimates

IHI is a very expensive ETF with richly valued companies. The weighted-average TTM "P/E" ratio of its holdings currently stands at 40.5X. This means it would take the fund 40 years of the past year's profits in order to repay its equity.

As I've said before, there is nothing inherently wrong about high valuations as long as earnings growth expectations can justify them. It is true that most of these firms have very high EPS growth over the past decade due to regulatory changes and an aging population, however, that does not mean future earnings growth will continue.

In fact, COVID-19 has resulted in a substantial decline in the long-term growth expectations of most of these IHI constituents. As you can see below, most

ChartData by YCharts

ChartData by YCharts

ChartData by YCharts

ChartData by YCharts

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This article was written by

Harrison Schwartz profile picture
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in IHI, ABT, MDT, TMO over the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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