Valuation Dashboard: Healthcare – Update – iShares Nasdaq Biotechnology ETF (NASDAQ:IBB)


This article series provides a monthly dashboard of industries in each sector of the GICS classification. It compares valuation and quality factors relative to their historical averages.

Executive summary

Biotechnology is close to its historical average in valuation ratios but below it in profitability measured in ROE. Pharmaceuticals look good in Price/Earnings and Price/Free Cash Flow but very bad in Price/Sales and ROE. Other healthcare industries look overvalued by at least 20%. Life Science Tools/Services are significantly above their baseline in profitability, which may partly justify overpricing. Healthcare Equipment is the less appealing group, significantly worse than its historical averages in all metrics.

Since last month:

  • P/E is stable in Managed Healthcare, Healthcare Technology, and Life Science Tools and has deteriorated in Biotechnology, Pharmaceuticals, and Healthcare Equipment.

  • P/S has improved in Healthcare Technology and Biotechnology and deteriorated in Life Science Tools, Pharmaceuticals, and Healthcare Equipment.

  • P/FCF has improved in Healthcare Equipment, Managed Healthcare, and Life Science Tools and deteriorated in Biotechnology, Pharmaceuticals, and Healthcare Technology.

  • ROE has improved in Life Sciences Tools and deteriorated in Healthcare Technology and Pharmaceuticals.

  • In one trailing month, the SPDR Select Sector Healthcare ETF (XLV) and the S&P 500 Pharmaceuticals ETF (XPH) have outperformed the SPDR S&P 500 ETF (SPY) by about 2%, whereas the Nasdaq Biotechnology ETF (IBB) did so by about 6%.

  • The five best performers among S&P 500 Healthcare stocks in this period are Biogen Inc. (NASDAQ:BIIB), Gilead Sciences Inc. (NASDAQ:GILD), Incyte Corp. (NASDAQ:INCY), Perrigo Company Plc (NASDAQ:PRGO), and Varian Medical Systems Inc. (NYSE:VAR).

Some cheap stocks in their industries

The stocks listed below are in the S&P 1500 index, cheaper than their respective industry factor for Price/Earnings, Price/Sales, and Price/Free Cash Flow. The 10 companies with the highest Return on Equity are kept in the final selection.

I update every month 8 lists like this one covering all sectors (some sectors are grouped). The 8 lists together have returned about 25% in 2016. If you want to stay informed of updates, click “Follow” at the top of this page. My Marketplace Subscribers have an early access to the stock lists before they are published in free articles. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

Amgen Inc. (NASDAQ:AMGN)

BIOTECH

Biogen Inc. (BIIB)

BIOTECH

Bioverativ Inc. (NASDAQ:BIVV)

BIOTECH

Eagle Pharmaceuticals Inc. (NASDAQ:EGRX)

BIOTECH

Gilead Sciences Inc. (GILD)

BIOTECH

AMN Healthcare Services Inc. (NYSE:AMN)

HCAREPROVID

DaVita Inc. (NYSE:DVA)

HCAREPROVID

McKesson Corp. (NYSE:MCK)

HCAREPROVID

INC Research Holdings Inc. (NASDAQ:INCR)

MEDEQUIP

Phibro Animal Health Corp. (NASDAQ:PAHC)

PHARMA

Detail of Valuation and Quality indicators in Healthcare on 9/1/2017

I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price-to-Sales (P/S), Price-to-Free Cash Flow (P/FCF), and Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor, I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average (“Avg”) between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above (“D-xxx”).

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

Health Care Equipment

46.58

27.18

-71.38%

4.28

3.18

-34.59%

43.55

30.51

-42.74%

-36.43

-12.14

-24.29

Managed Health Care

26.67

20.88

-27.73%

1.07

0.85

-25.88%

21.15

17.75

-19.15%

8.03

5.78

2.25

Health Care Technology*

78.89

56.13

-40.55%

3.18

3.39

6.19%

40.42

35.77

-13.00%

-20.98

-6.2

-14.78

Biotechnology

40.12

39.78

-0.85%

35.81

29.01

-23.44%

34.09

43.74

22.06%

-76.88

-64.42

-12.46

Pharmaceuticals

28.6

26.26

-8.91%

18.98

8.25

-130.06%

24.93

32.55

23.41%

-69.4

-30.3

-39.1

Life Sciences Tools/Services*

39.77

29.52

-34.72%

3.89

3.39

-14.75%

31.69

27.28

-16.17%

-7.19

-18.37

11.18

* Averages since 2006

The following charts give an idea of the current status of 3 valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors, the difference to average is calculated in the direction where positive is good. For valuation, ratios lower is better; for ROE, higher is better. On the charts below, higher is always better.

Price/Earnings relative to historical average:

Price/Sales relative to historical average:

Price/Free Cash Flow relative to historical average:

ROE relative to historical average:

Momentum

The next chart compares the price action of XLV, XPH, and IBB with SPY in 1 month.

If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article.

Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).

Disclosure: I am/we are long IBB, GILD, AMGN.

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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Valuation Dashboard: Healthcare – Update – iShares Nasdaq Biotechnology ETF (NASDAQ:IBB)

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