Healthcare And Biotechnology Dashboard – Update

Via SeekingAlpha.com

This article series provides a monthly dashboard of industries classified by sectors. It compares valuation and quality factors relative to their historical averages in each industry.

Executive summary

Combining 3 valuation ratios, biotechnology and pharmaceuticals look underpriced relative to historical averages. However, profitability measured in return on equity is significantly below the historical baseline, especially for pharmaceuticals. Other healthcare industries are overvalued. Profitability is above the historical baseline in life sciences tools/services, which may partly justify overpricing for this group.

Since last month:

  • P/E has improved in healthcare technology, is stable in pharmaceuticals, and deteriorated elsewhere.
  • P/S has deteriorated in all healthcare industries.
  • P/FCF has improved in HC equipment, HC providers, biotechnology, and deteriorated in HC technology.
  • In 1 trailing month, the Nasdaq Biotechnology ETF (IBB) has outperformed the SPDR S&P 500 ETF by 2.3 % and the SPDR Select Sector Healthcare ETF (XLV) has lagged it by about 5%.
  • The five best performers among S&P 500 healthcare stocks on this period are Abiomed, Inc. (ABMD), Align Technology, Inc. (ALGN), DexCom, Inc. (DXCM), Hologic, Inc. (HOLX), and Illumina, Inc. (ILMN).

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 (excluding extraordinary items), price/sales, and price/free cash flow. The 10 companies with the highest return on equity are kept in the final selection. The list was published for subscribers at the beginning of the month based on data available at this time. This is not investment advice. Do your own research before buying.

READ ALSO  How to feel better - Some economies are bouncing back. But recoveries can easily go wrong | Finance & economics

ALXN

Alexion Pharmaceuticals Inc

BIOTECH

BIIB

Biogen Inc

BIOTECH

GILD

Gilead Sciences Inc

BIOTECH

VNDA

Vanda Pharmaceuticals Inc

BIOTECH

BSX

Boston Scientific Corp

HCAREEQSUPP

LNTH

Lantheus Holdings Inc

HCAREEQSUPP

DVA

DaVita Inc

HCAREPROVID

WAT

Waters Corp

MEDEQUIP

CORT

Corcept Therapeutics Inc

PHARMA

INVA

Innoviva Inc

PHARMA

Detail of valuation and quality indicators in healthcare on 5/26/2020

I take 4 aggregate industry factors: 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

Healthcare Equipment

53.80

27.18

-97.94%

5.18

3.18

-62.75%

55.19

30.51

-80.90%

-43.10

-12.14

-30.96

Healthcare Providers

29.50

20.88

-41.26%

1.19

0.85

-40.32%

19.79

17.75

-11.49%

-1.46

5.78

-7.24

Healthcare Technology*

52.87

56.13

5.81%

6.83

3.39

-101.53%

46.44

35.77

-29.82%

-9.41

-6.2

-3.21

Biotechnology

30.42

39.78

23.53%

36.23

29.01

-24.90%

22.05

43.74

49.59%

-76.35

-64.42

-11.93

Pharmaceuticals

20.01

26.26

23.81%

7.74

8.25

6.19%

21.62

32.55

33.58%

-85.27

-30.3

-54.97

Life Sciences Tools/Services*

52.04

29.52

-76.27%

5.24

3.39

-54.60%

35.67

27.28

-30.76%

-4.61

-18.37

13.76

READ ALSO  Netflix's "Unsolved Mysteries" Reboots Mysterious 2006 Death Of Stansberry Research Employee

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 and IBB with the benchmark in 1 month.

Chart by TradingView

Quantitative Risk & Value (QRV) closely follows risk indicators to get clues about the outcome of this black swan. Besides our usual value and dividend stock lists, we have added a 5-stock mega-cap portfolio to weather the crisis, and some opportunities in closed-end funds resulting from volatility. Moreover, we plan to add a new stock list based on all-terrain quant models to help navigate the future market regime. Get started with a two-week free trial and see how QRV can improve your investing decisions.

Disclosure: I am/we are long ALXN, GILD. 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.