PBE: Healthcare Dashboard For March

Summary

• The pharma/biotech subsector is undervalued by 16% relative to 11-year averages.
• Healthcare equipment is the less attractive subsector regarding both valuation and quality.
• Fast facts on PBE, a biotechnology and genomics ETF.
• 10 stocks cheaper than their peers in November.
• Quantitative Risk & Value members get exclusive access to our real-world portfolio. See all our investments here »

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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	-36.30	-14.47	0.0233	0.2094	0.0132	9.33	65.15	0.0322	0.2725	0.0315	13.65	63.46	-1.00%	-8.00%
HC Providers	1.56	-8.17	0.0550	1.5860	0.0549	16.16	19.96	0.0523	1.4202	0.0625	15.90	24.33	-7.81%	-3.82%
Pharma/Biotech	16.34	20.07	0.0458	0.2181	0.0458	31.08	77.26	0.0370	0.2420	0.0339	21.52	80.70	-7.01%	7.04%
Life Science Tools	-17.19	3.81	0.0307	0.1931	0.0235	16.06	58.96	0.0296	0.2822	0.0308	15.99	55.04	-5.31%	-6.21%

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Value and Quality chart

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

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

Evolution since last month

The value and quality scores have improved in pharma/biotech and deteriorated in healthcare equipment.

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

Momentum

The next chart plots momentum data.

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

Interpretation

The pharma/biotech subsector is undervalued by 16% relative to 11-year averages, and its quality score is above the historical baseline. Healthcare providers are close to their baseline in both value and quality scores. Using the same metrics, life science tools and healthcare equipment are overvalued by about 17% and 36%, respectively. Healthcare equipment is the less attractive subsector regarding both valuation and quality.

Fast facts on PBE

Genomics is the new frontier in biotechnology. Invesco Dynamic Biotechnology & Genome ETF (NYSEARCA:PBE) was launched on 06/23/2005 and tracks the Dynamic Biotech & Genome Intellidex℠ Index. Its total expense ratio is a bit higher than for iShares Biotechnology ETF (IBB): 0.57% vs. 0.44%. Both are significantly above the sector benchmark XLV (0.10%).

As described by Invesco:

The Index is comprised of securities of 30 US biotechnology and genome companies. These are companies that are principally engaged in the research, development, manufacture and marketing and distribution of various biotechnological products, services and processes and companies that benefit significantly from scientific and technological advances in biotechnology and genetic engineering and research.

The portfolio is quite concentrated: the aggregate weight of the top 10 holdings is 45.7% (list and ratios in the next table). However, no holding is significantly above 5%, so risks related to individual companies are moderate.

Ticker	Name	Weight%	EPS growth%	P/E ttm	P/E fwd	Yield%
REGN	Regeneron Pharmaceuticals, Inc.	5.28	-46.94	20.05	18.36	0
VRTX	Vertex Pharmaceuticals, Inc.	5.19	42.02	23.03	20.81	0
AMGN	Amgen, Inc.	4.98	17.54	19.04	12.84	3.70
BIIB	Biogen, Inc.	4.96	101.31	12.54	16.89	0
GILD	Gilead Sciences, Inc.	4.85	-26.25	21.92	11.67	3.76
INCY	Incyte Corp.	4.85	-64.37	48.62	24.42	0
UTHR	United Therapeutics Corp.	4.44	49.92	14.68	11.67	0
BMRN	BioMarin Pharmaceutical, Inc.	4.38	308.30	123.58	102.78	0
CDMO	Avid Bioservices, Inc.	3.4	1032.35	11.35	326.78	0
SRPT	Sarepta Therapeutics, Inc.	3.33	-56.07	N/A	N/A	0

Click to enlarge

Since inception in June 2005, PBE has underperformed the sector benchmark XLV and the industry benchmark IBB (see next chart).

PBE vs XLV, IBB, since June 2005 (Seeking Alpha)

However, it has outperformed them in the last 12 months, by a short margin for IBB:

PBE vs XLV, IBB, last 12 months (Seeking Alpha)

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 0.0458 (or price/earnings below 21.83) 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.
IRWD	Ironwood Pharmaceuticals, Inc.
MRNA	Moderna, Inc.
AMN	AMN Healthcare Services, Inc.
PFE	Pfizer Inc.
INVA	Innoviva, Inc.
ABC	AmerisourceBergen Corp.
CCRN	Cross Country Healthcare, Inc.
DVA	DaVita, Inc.
THC	Tenet Healthcare Corp.

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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.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of 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.