BBH ETF: Buy This ETF At Discounted Price And Hold It For Long Term

Summary

  • BBH’s price multiples indicate an undervaluation and its major holdings have started recording significant price growth.
  • BBH has strong fundamentals and has performed well enough in the medium and long term.
  • BBH will face some minor ups and downs since most stocks are yet to recover from their steep fall in the second half of 2021.
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VanEck Vectors Biotech ETF (NASDAQ:BBH) is a healthcare exchange traded fund (ETF), launched and managed by Van Eck Associates Corporation. The fund has an asset under management (AUM) of approximately $438 million, which it has invested in public equity shares of 25 large-cap and mid-cap Biotechnology companies (including a few life sciences tools and services firms). The fund fully replicates the composition of MVIS US Listed Biotech 25 Index (MVBBHTR). This ETF was formed on October 24, 1999 and is domiciled in the United States. It has an expense ratio of 0.35 percent.

VanEck Vectors Biotech ETF has a weighted average market capitalization of $51,889 million and has been paying only annual dividends since 2013. Prior to that, this ETF paid frequent special dividends. However, BBH’s average annual yield is negligible, less than 0.5 percent. Thus, this ETF is out of consideration of income seeking investors.

Anyhow, BBH’s price returns have been exceptionally strong over the long term, and adequate over the medium term. Since its inception almost 22.5 years back, VanEck Vectors Biotech ETF generated a price growth in excess of 1,200 percent, i.e., a CAGR of 37.5 percent. Over the past 3 years, 5 years and 10 years, BBH’s price grew by 24 percent, 22 percent, and 228 percent respectively. Over the same period of time, S&P 500 recorded a price growth of 42 percent, 75 percent, and 198 percent, respectively.

Price growth of 24 percent over the past three years, and 22 percent over the past five years implies that this ETF has been much more successful since the COVID-19 pandemic period market crash than its price performance over 2018 and 2019. During that period, VanEck Vectors Biotech ETF had to feel the pinch of another major backlash in the US stock market due to higher tariff, interest rate hikes, and tax cuts in the economy. Incidentally, this ETF was trading within a range of $135 to $145 in the past 100 days just before the pandemic period market crash in mid-March, 2020.

An analysis of VanEck Vectors Biotech ETF’s holdings reveals that it has invested almost 80 percent of its total fund only in 14 large-cap biotechnology stocks - Amgen Inc. (AMGN), Moderna (MRNA), Gilead Sciences Inc. (GILD), Regeneron Pharmaceuticals Inc. (REGN), Vertex Pharmaceuticals Inc. (VRTX), Illumina Inc. (ILMN), IQVIA holdings Inc. (IQV), Biogen Inc. (BIIB), Seagen Inc. (SGEN), Alnylam Pharmaceuticals Inc. (ALNY), BioNTech SE (BNTX), Bio-Techne Corp (TECH), BeiGene Ltd. (BGNE), and ICON Public Limited Company (ICLR).

Incidentally, biotechnology stocks had an extremely poor past 12 months. Barring VRTX (24 percent), REGN (37 percent), and ALNY (9.6 percent), all other 22 stocks had recorded poor growth. Most notably 20 stocks had negative growth and BMRN (0.68 percent) and ICLR (0.05 percent) had negligible positive growth. As a result, BBH’s market price fell by approximately 21 percent, while S&P 500 recorded a growth of 1.34 percent over the past one year. BBH’s market price also dropped by 25 percent over the past six months, whereas S&P500 recorded a growth of 15.5 percent over the same period.

However, the positive news for VanEck Vectors Biotech ETF’s investors is that over the past six months, five of its major holdings constituting 35 percent of BBH’s portfolio have posted high double digit price growth. These stocks were - VRTX (48 percent), AMGN (20.5 percent) REGN (14.5 percent), INCY (14 percent) and BMRN (11 percent). Most importantly, BBH’s prime holding, AMGN, recorded 20 percent plus price growth.

VanEck Vectors Biotech ETF has put a high bet on AMGN with almost 15 percent of the total fund invested in it. As the AMGN share is fast moving up, this ETF is benefitting from it. AMGN’s market price recorded a growth of 12 percent in the past three months, and 20.4 percent in past six months. AMGN is part of BBH’s portfolio for the past 10 years. In the past five years also, AMGN recorded a healthy growth of 52.33 percent. However, in the past one year, the price fell by a marginal 2.5 percent. AMGN’s price growth will surely pull up this ETF and enable BBH to record better growth in this calendar year.

Moreover, the fundamentals remain strong, despite poor price performance of BBH’s stock. The companies selected in VanEck Vectors Biotech ETF have an average sales growth of 25.5 percent and earnings growth of 27.8 percent. On an average, these 25 companies had a cash flow growth of 20 percent and book value growth of 22 percent. In my opinion, the macroeconomic factors played a major role in under-performance of large-cap biotechnology firms, and the financial performance of biotechnology companies hardly had any major impact.

VanEck Vectors Biotech ETF’s current price multiples are a bit on the lower side, indicating an undervaluation. A Price/Earnings of 14.08, Price/Book of 3.71, Price/Sales of 1.04 and a Price/Cash Flow of 11.43 is relatively lower than industry average as well that of S&P 500 index. In my opinion, the most likely reason for such undervaluation is the consistent poor performance of biotechnology stocks over the past 12 months. Investors don't seem to be convinced yet about BBH’s potential of generating strong and steady future earnings.

VanEck Vectors Biotech ETF is trading at only 2 percent premium to its 52-week low of $146.88 and there is scope for a further downward rally of this fund, as indicated by the simple moving averages. The long-term moving averages of this fund are placed significantly higher than the short-term moving averages. As of 28th April, 2022, the 200-day SMA (185.62), 100-day SMA (167.26), and 50-day SMA (158.12) are indicative of a bearish rally for this ETF.

In my opinion, VanEck Vectors Biotech ETF will be able to post respectable price growth by the end of 2022, as the ETF seems undervalued, and the major holdings of this ETF have started recording significant price growth. This ETF has strong fundamentals, and has performed well enough in the medium and long term. However, this ETF will face some minor ups and downs since most of the stocks are yet to recover from their steep fall in the second half of 2021. The technical indicators also suggest a bearish rally.

Thus, in my opinion, the next three to five months are the best time to buy this ETF, and investors need to wait for an opportune moment for the price to fall for probably another 5 to 10 percent. Such a price fall will take this stock to its pre-pandemic price level. Since the investors don’t need to bother about losing out on the dividend income, the wait will be justified. However, once bought, investors need to hold VanEck Vectors Biotech ETF for a longer period of time in order to realize its full potential.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.

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