IYH: Healthcare Dashboard For September

Summary

  • Pharmaceuticals/biotechnology and healthcare providers are undervalued relative to 11-year averages.
  • Healthcare equipment is the most overpriced subsector.
  • Fast facts on IYH, an alternative to XLV.
  • 10 stock cheaper than their peers in September.
  • 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. Companies used to calculate these metrics are the largest holdings of ETFs like the Health Care Select Sector SPDR ETF (XLV) and the iShares U.S. Healthcare ETF (NYSEARCA:IYH). Therefore, this is also a review of such funds.

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

-24.36

-2.11

0.0298

0.2148

0.0199

12.55

66.88

0.0333

0.2792

0.0329

13.96

63.15

-7.14%

-25.32%

HC Providers

10.01

2.48

0.0577

1.4234

0.0762

19.28

20.41

0.0526

1.4433

0.0626

15.91

24.38

-4.23%

-1.72%

Pharma/Biotech

22.85

32.70

0.0510

0.2242

0.0491

34.62

80.78

0.0374

0.2506

0.0344

20.96

80.62

-4.28%

6.32%

Life Science Tools

-19.10

6.39

0.0306

0.1715

0.0253

16.66

59.39

0.0299

0.2906

0.0311

15.83

55.24

-13.67%

-28.97%

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 healthcare equipment and life science tools.

Value and quality variations

Value and quality variations (Chart: author; data: Portfolio123)

Momentum

The next chart plots median returns by subsector.

Momentum in healthcare

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

Interpretation

Pharma/biotech has the best value and quality scores of all subsectors. It is undervalued by about 23% relative to 11-year averages. Healthcare providers are undervalued by about 10%, and they are close to their quality baseline. Healthcare equipment and life science tools are overvalued by about 24% and 19% relative to historical averages, respectively. Their quality scores are close to the baseline, and can’t justify such overvaluation.

Fast facts on IYH

The iShares U.S. Healthcare ETF (IYH) has been tracking the Russell 1000 Health Care RIC 22.5/45 Capped Index since 06/12/2000. It has a portfolio of 114 stocks, an expense ratio of 0.39% and a distribution yield of 1.12%.

The next table lists the top 10 holdings with fundamental ratios. The portfolio is quite concentrated: their aggregate weight is 53.7% of asset value and the top 2 names represent about 19% together.

Ticker

Name

Weight%

EPS growth %ttm

P/E ttm

P/E fwd

Yield%

UNH

UnitedHealth Group, Inc.

9.89

26.45

27.21

23.84

1.27

JNJ

Johnson & Johnson

8.95

3.44

24.36

16.60

2.70

LLY

Eli Lilly & Co.

5.28

-5.81

49.26

38.54

1.27

PFE

Pfizer Inc.

5.28

118.65

9.01

7.08

3.48

ABBV

AbbVie, Inc.

5.17

90.35

20.39

10.40

3.92

MRK

Merck & Co., Inc.

4.5

198.27

13.43

11.87

3.15

TMO

Thermo Fisher Scientific Inc.

4.3

-12.99

28.81

23.56

0.22

DHR

Danaher Corp.

3.64

13.17

32.63

26.50

0.36

ABT

Abbott Laboratories

3.62

34.71

21.70

20.57

1.81

BMY

Bristol Myers Squibb Co.

3.09

232.36

23.76

9.53

3.02

Ratios: Portfolio123

Since June 2000, IYH has lagged XLV, but the difference in annualized return is not significant (31 bps). Risk measured in drawdowns and standard deviation of monthly returns is similar in both ETFs. They have outperformed the broad index S&P 500 (SPY) and are less volatile.

Total return

Annualized return

Max Drawdown

Sharpe ratio

Volatility

IYH

450.96%

7.97%

-43.13%

0.5

14.19%

XLV

487.09%

8.28%

-40.53%

0.53

14.61%

SPY

297.58%

6.40%

-55.42%

0.41

15.36%

IYH vs. XLV

IYH vs. XLV (Portfolio123)

IYH is not really a good alternative to XLV. It is more expensive in total expense ratio (0.39% vs. 0.10%), and the higher number of holdings (114 vs. 65) doesn’t make a significant difference in past performance and risk metrics. Both funds are concentrated, with over 50% of asset value in the top 10 holdings. Moreover, XLV has a much higher trading volume, making it a better choice for short-term trading and tactical allocation. If concentration is a concern, the Invesco S&P 500 Equal Weight Health Care ETF (RYH) may be a better choice.

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 0.0510 (or price/earnings below 19.61) 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.

QDEL

QuidelOrtho Corp.

PFE

Pfizer Inc.

DVAX

Dynavax Technologies Corp.

HNGR

Hanger, Inc.

MRNA

Moderna, Inc.

ABC

AmerisourceBergen Corp.

DVA

DaVita, Inc.

ITOS

iTeos Therapeutics, 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
14.51K 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 a beneficial long position in the shares of MRK, PFE either through stock ownership, options, or other derivatives. 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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