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This monthly article series features a dashboard of aggregated healthcare industry metrics. It can also serve as a top-down analysis of a number of healthcare ETFs, such as the Health Care Select Sector SPDR ETF (XLV) and the iShares US Healthcare Providers ETF (IHF), whose largest holdings are used to calculate these metrics.
shortcut
The next two paragraphs in italics describe the dashboard methodology. They are required for new readers to understand the metrics. If you are used to these series or short on time, you can skip them and go to the charts.
base metrics
I calculate the median of five fundamental metrics 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 US stock market. The five basic key figures are calculated for the last 12 months. The same applies to everyone: higher is better. EY, SY, and FY are medians of the reciprocals of price/earnings, price/sales, and price/free cash flow. They lend themselves better to statistical studies than price-to-something ratios, which are useless or unavailable when the “something” is near zero or negative (e.g., companies with negative earnings). I also look at two momentum metrics for each group: mean monthly return (RetM) and mean annual return (RetY).
I prefer medians to averages because a median divides a set into a good half and a bad half. A cap-weighted average is skewed by extremes and the largest companies. My metrics are designed for stock selection rather than index investing.
Value and quality indicators
I calculate historical baselines for all metrics. They are labeled EYh, SYh, FYh, ROEh, GMh, respectively, and are calculated as average values for an 11-year look-back period. For example, the value of EYh for healthcare providers in the table below is the 11-year average median earnings yield in that industry.
The Value Score (“VS”) is defined as the average % difference between the three valuation metrics (EY, SY, FY) and their baselines (EYh, SYh, FYh). Likewise, the quality score (“QS”) is the average difference between the two quality scores (ROE, GM) and their baseline values (ROEh, GMh).
The values are given in percentage points. VS can be interpreted as percentage of under- or overvaluation relative to baseline (positive is good, negative is bad). This interpretation needs to be treated with caution: the baseline is an arbitrary reference, not an assumed fair value. The formula assumes that the three valuation metrics are equally important.
Current data
The next table shows the metrics and ratings at the end of the last week. Columns represent all of the above and defined data.
|
vs |
QA |
EY |
HIS |
GJ |
ROE |
GM |
Ah |
SYh |
FYh |
ROEh |
GMh |
RetM |
RetY |
|
|
HC equipment |
-32.71 |
9.78 |
0.0273 |
0.1644 |
0.0234 |
15.85 |
67.93 |
0.0348 |
0.2916 |
0.0349 |
14.26 |
62.64 |
-0.0578 |
0.0425 |
|
HC provider |
-5.39 |
-1.12 |
0.0550 |
1.1594 |
0.0654 |
17.43 |
21.61 |
0.0532 |
1.5003 |
0.0634 |
15.96 |
24.41 |
-0.0237 |
0.0246 |
|
Pharma/Biotech |
1.68 |
31.44 |
0.0356 |
0.2036 |
0.0473 |
32.41 |
80.14 |
0.0384 |
0.2625 |
0.0351 |
19.87 |
80.34 |
-0.0866 |
-0.1731 |
|
life science tools |
-37.51 |
4.49 |
0.0214 |
0.1378 |
0.0235 |
15.74 |
59.58 |
0.0307 |
0.3032 |
0.0325 |
15.49 |
55.49 |
-0.0923 |
0.1968 |
value and quality diagram
The next chart shows Value and Quality Score by industry (higher is better).
value and quality in healthcare
Chart: Author; Data: Portfolio123
development since last month
Since last month, value scores have deteriorated in healthcare providers, pharma/biotech and improved in life science tools.
fluctuations in value and quality
Chart: Author; Data: Portfolio123
momentum
The next chart shows impulse data.
momentum in healthcare
Chart: Author; Data: Portfolio123
interpretation
The most fundamentally attractive healthcare sub-sector is pharmaceuticals/biotechnology: the near-zero value score means it is in the 11-year average on aggregate valuation metrics. In addition, the quality rating is excellent. However, the momentum is very poor: the median return over the last 12 months for this group of companies is -17%. Healthcare providers are close to their baseline in both score and quality. The next paragraph focuses on an ETF in this industry. Life science tools and medical devices are overstated by more than 30% in my metrics, and quality scores are slightly above baseline.
Focus on IHF
The iShares US Healthcare Providers ETF has followed the Dow Jones US Select Health Care Providers Index since May 1st, 2006. It has a total expense ratio of 0.42%, which is significantly higher than other passive healthcare index ETFs like XLV (0.12%).
As of this writing, the fund holds 73 stocks and is heavily concentrated in a few names. The next table shows the top 10 stocks with their weights, fundamental valuation ratios, and dividend yields. Their total weight is about 75.5%.
|
ticker |
Surname |
Weight (%) |
EPS growth %TTM |
P/E TTM |
P / E forward |
Yield (%) |
|
UNH |
United Health Group Inc |
22.47 |
-7.38 |
07/29 |
24.88 |
1.24 |
|
resume |
CVS Health Corp |
15.48 |
-5.56 |
18.57 |
02/13 |
2.07 |
|
ANTME |
Anthem, Inc. |
9.68 |
15.19 |
20.29 |
17.43 |
1.00 |
|
THERE |
Cigna Corp |
5.23 |
66.60 |
10.19 |
11.86 |
1.65 |
|
CNC |
centene corp |
4.90 |
-65.67 |
65.17 |
15.73 |
0 |
|
HCA |
HCA Healthcare, Inc. |
4.80 |
98.72 |
13.09 |
14.46 |
0.75 |
|
TO HUM |
Humana Inc. |
4.00 |
-33.64 |
18.92 |
07/19 |
0.71 |
|
LH |
Holdings of Laboratory Corp of America |
3.89 |
227.72 |
9.80 |
03/10 |
0 |
|
DGX |
Search Diagnostics Inc |
2.57 |
106.18 |
8.55 |
24.10 |
1.74 |
|
MOH |
Molina Healthcare, Inc. |
2.46 |
-24.45 |
28.40 |
21.39 |
0 |
The IHF has outperformed the broader sector ETF XLV by 50 basis points on an annualized basis since inception. However, it shows much higher risk in drawdown and volatility. The risk-adjusted performance (Sharpe ratio) is significantly worse.
|
total return |
Annualized return |
Maximum drawdown |
Sharpe ratio |
volatility |
|
|
IHF |
515.53% |
12.27% |
-58.82% |
0.68 |
19.06% |
|
XLV |
473.33% |
11.77% |
-39.17% |
0.83 |
14.01% |
Data calculated with Portfolio123
In summary, IHF is designed for investors seeking capital-weighted exposure to healthcare providers. It can also be used as part of tactical allocation strategies. Three quarters of the portfolio’s value is concentrated in the top 10 holdings and over 47% in the top 3 names. Exposure to risks related to UnitedHealth Group and CVS Health is particularly high. IHF has slightly outperformed XLV since inception, but management fees and risk metrics are significantly higher than for the broad healthcare sector ETF.
Dashboard list
I use the first table to calculate value and quality ratings. It can also be used in a stock picking process to check how companies are performing compared to their peers. For example, the EY column tells us that a large pharma/biotech company with an earnings yield above 0.0356 (or price/earnings below 28.09) is in the better half of the industry on this metric. Each month, a dashboard list is sent to Quantitative Risk & Value subscribers, where the most profitable companies simultaneously rank in the better half of the peer group on the three valuation metrics. The following list was sent to subscribers a few weeks ago based on the data available at the time.
|
INVA |
Innoviva, Inc. |
|
RAIN |
Regeneron Pharmaceuticals, Inc. |
|
COLL |
College Pharmaceuticals, Inc. |
|
HOLX |
Hologic, Inc. |
|
DVA |
DaVita Inc. |
|
THC |
Tenet Healthcare Corp |
|
OR WALK |
Organogenesis Holdings Inc. |
|
S.E.M |
Select Medical Holdings Corp |
|
QDEL |
Quidel Corp |
|
WHY |
uniQure NV |
It is a rotating list with a statistical bias towards long-term excess returns, not the result of an analysis of each stock.
