This monthly article series shows a dashboard with aggregate industry metrics in healthcare. It may also serve as a top-down analysis of a number of healthcare ETFs like Health Care Select Sector SPDR ETF (XLV) and iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF), 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 writing. Columns stand for all the data defined above.
VS |
QS |
EY |
SY |
FY |
ROE |
GM |
EYh |
SYh |
FYh |
ROEh |
GMh |
RetM |
RetY |
|
HC Equipment |
-26.15 |
-5.81 |
0.0239 |
0.2089 |
0.0139 |
11.05 |
64.96 |
0.0280 |
0.2472 |
0.0269 |
12.69 |
64.13 |
-3.18% |
-6.30% |
HC Providers |
-12.15 |
-15.80 |
0.0457 |
1.4005 |
0.0429 |
13.40 |
19.29 |
0.0508 |
1.3579 |
0.0609 |
15.58 |
23.41 |
-0.79% |
11.15% |
Pharma/Biotech |
-33.16 |
-17.32 |
0.0203 |
0.1824 |
0.0193 |
15.20 |
77.80 |
0.0351 |
0.2230 |
0.0317 |
22.02 |
80.79 |
-1.16% |
15.76% |
Life Science Tools |
-15.77 |
-4.70 |
0.0248 |
0.1692 |
0.0286 |
13.46 |
58.56 |
0.0280 |
0.2624 |
0.0287 |
16.22 |
54.40 |
-8.96% |
1.79% |
Value and Quality chart
The next chart plots the Value and Quality Scores by subsector (higher is better).
Value and quality in healthcare (Chart: author; data: Portfolio123)
Evolution since last month
Valuation has materially improved in healthcare equipment and life science tools.
Variations in value and quality (Chart: author; data: Portfolio123)
Momentum
The next chart plots median returns by subsector.
Momentum in healthcare (Chart: author; data: Portfolio123)
Interpretation
The healthcare sector was moderately overvalued relative to 11-year averages in my latest S&P 500 dashboard. As of writing, healthcare providers are the least overvalued subsector, while pharmaceuticals/biotechnology are the most overpriced one, and also show the worst quality score. Quality is below the historical baseline in all healthcare industries.
Focus on IHF
iShares U.S. Healthcare Providers ETF has been tracking the Dow Jones U.S. Select Health Care Providers Index since 05/01/2006. It has a total expense ratio of 0.40%, whereas broader sector ETFs like XLV charge only 0.09%.
IHF holds 67 stocks and is very concentrated in a few names. The next table shows the top 10 holdings with their weights and some fundamental ratios. Their represent almost 74% of the fund’s asset value. Risks relative to the top names, and especially to UnitedHealth Group, are high.
Ticker |
Name |
Weight (%) |
EPS growth %TTM |
P/E TTM |
P/E fwd |
Yield (%) |
UNH |
UnitedHealth Group, Inc. |
23.71 |
-25.13 |
30.37 |
17.94 |
1.69 |
ELV |
Elevance Health, Inc. |
14.33 |
2.95 |
20.21 |
14.35 |
1.22 |
CI |
The Cigna Group |
8.95 |
-44.44 |
27.36 |
11.69 |
1.68 |
HUM |
Humana, Inc. |
4.76 |
-34.70 |
22.34 |
21.94 |
0.99 |
HCA |
HCA Healthcare, Inc. |
4.75 |
0.59 |
16.82 |
16.20 |
0.78 |
CNC |
Centene Corp. |
4.01 |
90.96 |
13.69 |
10.07 |
0 |
VEEV |
Veeva Systems, Inc. |
3.73 |
5.98 |
54.47 |
29.97 |
0 |
CVS |
CVS Health Corp. |
3.70 |
87.44 |
10.58 |
8.51 |
4.42 |
MOH |
Molina Healthcare, Inc. |
3.00 |
25.49 |
16.66 |
13.01 |
0 |
LH |
Labcorp Holdings, Inc. |
2.80 |
-54.99 |
40.36 |
13.47 |
1.44 |
IHF has underperformed XLV by 47 bps in annualized return since inception, as reported in the next table. Additionally, it shows a much higher risk measured in maximum drawdown and historical volatility (measured as standard deviation of monthly returns).
Total return |
Annualized return |
Max Drawdown |
Sharpe ratio |
Volatility |
|
IHF |
498.33% |
10.38% |
-58.82% |
0.56 |
18.58% |
XLV |
546.43% |
10.85% |
-39.17% |
0.71 |
14.13% |
Data calculated with Portfolio123
IHF is lagging XLV by more than 20% over the last 3 years:
IHF vs XLV, 3-year total return (Seeking Alpha)
In summary, IHF is designed for investors seeking capital-weighted exposure to healthcare providers. It may also be used as a component of tactical allocation strategies. The portfolio is overweight in the top constituents. Exposure to UnitedHealth Group and Elevance Health is especially high, with an aggregate weight of 38%. Moreover, 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 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 0.0457 (or price/earnings below 21.88) is in the better half of the industry regarding this metric. A Dashboard List is sent every month with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The stocks below are part of the list sent a few weeks ago.
COLL |
Collegium Pharmaceutical, Inc. |
INVA |
Innoviva, Inc. |
HRMY |
Harmony Biosciences Holdings, Inc. |
ALKS |
Alkermes plc |
AMN |
AMN Healthcare Services, Inc. |
MOH |
Molina Healthcare, Inc. |
GEHC |
GE HealthCare Technologies, Inc. |
THC |
Tenet Healthcare Corp. |
DVA |
DaVita, Inc. |
SEM |
Select Medical Holdings Corp. |
It is a rotational model with a statistical bias toward excess returns on the long-term, not the result of in-depth stock analysis.
Read the full article here