IDNA: Healthcare Dashboard For August

Summary

  • Pharmaceutical/biotechnology is the subsector with the highest value and quality scores.
  • Life science tools and healthcare equipment are the most overvalued.
  • Fast facts on IDNA.
  • 10 stocks cheaper than their peers in August.
  • Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

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This monthly article series shows a dashboard with aggregate industry metrics in healthcare. It may also serve as a top-down analysis of sector ETFs like the iShares U.S. Healthcare ETF (IYH) and the Health Care Select Sector SPDR ETF (XLV), whose largest holdings are used to calculate these metrics.

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios for each industry: Earnings Yield ("EY"), Sales Yield ("SY"), Free Cash Flow Yield ("FY"), Return on Equity ("ROE"), Gross Margin ("GM"). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on trailing 12 months. For all of them, higher is better. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable or non available when the "something" is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median splits a set in a good half and a bad half. A capital-weighted average is skewed by extreme values and the largest companies. My metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

I calculate historical baselines for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as the averages on a look-back period of 11 years. For example, the value of EYh for healthcare providers in the table below is the 11-year average of the median Earnings Yield in this industry.

The Value Score ("VS") is defined as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the Quality Score ("QS") is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

The scores are in percentage points. VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance.

Current Data

The next table shows the metrics and scores as of last week's closing. Columns stand for all the data named and defined above.

VS

QS

EY

SY

FY

ROE

GM

EYh

SYh

FYh

ROEh

GMh

RetM

RetY

HC Equipment

-31.62

2.69

0.0251

0.2026

0.0192

13.93

66.88

0.0335

0.2806

0.0331

14.02

63.09

12.03%

-13.20%

HC Providers

10.88

-0.43

0.0578

1.4956

0.0747

18.89

19.59

0.0526

1.4486

0.0625

15.90

24.39

8.04%

6.59%

Pharma/Biotech

24.28

33.29

0.0521

0.2264

0.0496

34.62

80.78

0.0375

0.2523

0.0344

20.81

80.59

1.93%

10.83%

Life Science Tools

-26.17

8.35

0.0288

0.1529

0.0229

17.26

59.36

0.0300

0.2922

0.0313

15.79

55.28

15.01%

-16.77%

Value and Quality Chart

The next chart plots the Value and Quality Scores by industry (higher is better).

Value and quality in healthcare

Value and quality in healthcare (Chart: author; data: Portfolio123)

Evolution Since Last Month

The value score has improved in pharma/biotech and deteriorated in healthcare equipment and life science tools. Quality has deteriorated in pharma/biotech.

Variations in value and quality

Variations in value and quality (Chart: author; data: Portfolio123)

Momentum

The next chart plots momentum data.

Momentum in healthcare

Momentum in healthcare (Chart: author; data: Portfolio123)

Interpretation

Pharma/biotech is still the best-ranked healthcare industry in both value and quality scores. It is undervalued by about 24% relative to 11-year averages and it is far above the quality baseline. Healthcare providers are undervalued by about 11% and they are close to their quality baseline. Life science tools and healthcare equipment are overvalued by more than 25% relative to the baseline. Their quality scores are good, but not high enough to offset such overvaluation.

Fast Facts on IDNA

Genomics is one of the most promising fields in the pharma/biotech industry. The iShares Genomics Immunology and Healthcare ETF (NYSEARCA:IDNA) provides exposure to innovative companies in genomics, immunology and bioengineering. Its total expense ratio is similar to the iShares Nasdaq Biotechnology ETF (IBB): 0.47% vs. 0.44%. Both are significantly above XLV (0.10%).

As defined in the prospectus by iShares,

The Fund seeks to track the investment results of the NYSE® FactSet® Global Genomics and Immuno Biopharma IndexTM (the "Underlying Index"), which measures the performance of equity securities issued by companies in the biopharmaceutical and healthcare equipment and services industries that could benefit from the long-term growth and innovation in genomics, immunology and bioengineering (…). Companies must have equal to or greater than 50% of their revenue from one or more selected Level 6 industries, as defined by the FactSet Revere Business Industry Classification System ("RBICS").

IDNA holds 49 stocks: 65.5% of asset value is in the U.S., 20.6% in Europe and 13.9% in Asia. The portfolio is quite concentrated: the aggregate weight of the top 10 holdings is 42% (list below).

Name

Ticker

Weight (%)

Location

BEAM THERAPEUTICS INC

BEAM

5.75

United States

FATE THERAPEUTICS INC

FATE

4.7

United States

INTELLIA THERAPEUTICS INC

NTLA

4.63

United States

BEIGENE LTD

BGNE*

4.37

China

MODERNA INC

MRNA

4.22

United States

GENMAB

GMAB

3.99

Denmark

TWIST BIOSCIENCE CORP

TWST

3.96

United States

BLUEPRINT MEDICINES CORP

BPMC

3.86

United States

GILEAD SCIENCES INC

GILD

3.42

United States

BIONTECH SE ADR

BNTX

3.38

Germany

*U.S. ticker for convenience. The fund holds shares in Hong Kong.

Since inception (06/11/2019), IDNA has slightly underperformed the sector benchmark XLV and is much more volatile than the industry benchmark IBB (see next chart). However, price history is too short to assess the strategy on past performance.

IDNA vs XLV vs IBB

IDNA vs XLV vs IBB (Chart: Portfolio123)

Dashboard List

I use the first table to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells us that a large pharma/biotech company with an Earnings Yield above 0.0521 (or price/earnings below 19.19) is in the better half of the industry regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on data available at this time.

VIR

Vir Biotechnology Inc

MRNA

Moderna Inc

ITOS

iTeos Therapeutics Inc

OGN

Organon & Co

IRWD

Ironwood Pharmaceuticals Inc

QURE

uniQure NV

QDEL

QuidelOrtho Corporation

ABC

AMERISOURCEBERGEN CORPORATION

DVA

DaVita Inc

THC

Tenet Healthcare Corp

It is a rotating list with a statistical bias toward excess returns on the long-term, not the result of an analysis of each stock.

From January 2017 to December 2021, the Dashboard List has returned about 81% (all sectors together) vs. 66% for its benchmark Russell 1000 Value Index (past performance is not a guarantee of future returns). QRV Members get updates on it and other time-tested strategies, plus risk indicators. Get started with a two-week free trial now.

This article was written by

Fred Piard profile picture
14.43K Followers
Data-driven portfolios and risk indicators.
Author of Quantitative Risk & Value and three books, I have been investing in systematic strategies since 2010. I have a PhD in computer science, an MSc in software engineering, an MSc in civil engineering and 30 years of professional experience in various sectors. My aim is making simple and efficient quantitative investing techniques available to my followers. Quantitative models can make investment decisions faster, reproducible and emotionless by focusing on relevant information in the middle of market noise. Moreover, models can be refined to meet specific risk tolerance and objectives. 

Step up your investing experience: try Quantitative Risk & Value for free now (limited offer).

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.

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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