IDNA - PBE: Healthcare Dashboard For June

2023-06-19 05:16:46 ET

Summary

• Pharma/biotechnology and healthcare providers are slightly undervalued relative to 11-year averages.
• Healthcare equipment is the most overvalued subsector.
• Fast facts on PBE, a genomics ETF.
• 10 healthcare stocks cheaper than their peers in June.

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.

Value and Quality chart

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

Evolution since last month

The value and quality scores have improved in life science tools.

Momentum

The next chart plots momentum scores based on median returns.

Interpretation

The pharma/biotech subsector is undervalued by 9% relative to 11-year averages, and its quality score is above the historical baseline. Healthcare providers are undervalued by 6% using the same metrics, but the quality score is below the baseline. 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 ( PBE ) started investing operations on 06/23/2005 and tracks the Dynamic Biotech & Genome Intellidex? Index. Its total expense ratio is 0.57%, a bit higher than for iShares Nasdaq Biotechnology ETF ( IBB ) and significantly above the sector benchmark XLV (0.44% and 0.10%, respectively).

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 top 10 holdings, listed below with fundamental ratios, have an aggregate weight of 46.6%. However, none of them is significantly above 5%, so risks related to individual companies are moderate.

Since 7/1/2005, PBE has underperformed the sector benchmark XLV and the industry benchmark IBB (see next chart).

In the last 12 months, PBE lags IBB but beats XLV. It also outperforms a close competitor: iShares Genomics Immunology and Healthcare ETF ( IDNA ).

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 healthcare provider company with an Earnings Yield above 0.0506 (or price/earnings below 19.76) 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.

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

For further details see: