IBB: Healthcare Dashboard For April (NASDAQ:IBB)

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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.

VS

QS

EY

SY

FY

ROE

GM

EYh

SYh

FYh

ROEh

GMh

RetM

RetY

HC Equipment

-32.02

5.30

0.0270

0.1746

0.0218

14.50

68.14

0.0342

0.2859

0.0341

14.19

62.84

-0.60%

-5.22%

HC Providers

-15.67

1.57

0.0482

1.0929

0.0550

18.42

21.33

0.0529

1.4711

0.0628

15.92

24.40

1.94%

4.21%

Pharma/Biotech

5.77

49.06

0.0434

0.1952

0.0441

40.25

79.64

0.0379

0.2578

0.0347

20.21

80.46

3.42%

-4.30%

Life Science Tools

-25.51

6.33

0.0258

0.1609

0.0267

16.43

59.42

0.0302

0.2976

0.0318

15.59

55.41

-4.17%

-6.32%

Value and Quality chart

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

Value and quality in healthcare

Value and quality in healthcare (Chart: author; data: Portfolio123)

Evolution since last month

Pharma/biotech has recently deteriorated in value and improved in quality score. Healthcare providers have also suffered a deterioration in value, but quality is unchanged.

Score variations

Score variations (Chart: author; data: Portfolio123)

Momentum

The next chart plots momentum data.

Momentum in healthcare

Momentum in healthcare (Chart: author; data: Portfolio123)

Interpretation

Pharmaceuticals and biotechnology are the most attractive healthcare industries. Despite a recent deterioration in value score, they are slightly undervalued relative to 11-year averages. Moreover, quality is far above the historical baseline. Other sectors are overvalued by 15% to 32% regarding the same metrics, and they are just above the quality baseline. Healthcare equipment is the most overvalued subsector.

Focus on IBB

Biotechnology is the most promising industry in the healthcare sector. The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) has been tracking the ICE Biotechnology Index since 02/05/2001. Its total expense ratio is 0.45%, which is significantly more expensive than XLV (0.12%).

As defined in the prospectus by iShares,

the Biotechnology Sub-Industry Group include those companies that are engaged in the research and development of therapeutic treatments but that are not focused on the commercialization and mass production of pharmaceutical drugs. The Biotechnology Sub-Industry Group also includes those companies that are engaged in the production of tools or systems that enable biotechnology processes.

IBB hold 372 stocks, mostly of U.S. companies (about 90%), with a maximum weight of 8.69%. The portfolio is quite concentrated: the aggregate weight of the top 10 holdings is 51.7% (list below).

Ticker

Name

Weight (%)

EPS growth%

P/E ttm

P/E fwd

Yield%

Location

AMGN

Amgen Inc

8.69

-16.29

24.65

14.43

3.05

U.S.

GILD

Gilead Sciences Inc

7.17

6218.18

12.53

9.53

4.72

U.S.

REGN

Regeneron Pharmaceuticals Inc

7.04

134.97

10.17

16.62

0

U.S.

VRTX

Vertex Pharmaceuticals Inc

6.75

-12.27

31.90

19.83

0

U.S.

MRNA

Moderna Inc

5.33

1558.86

5.86

5.99

0

U.S.

IQV

Iqvia Holdings Inc

4.01

247.19

48.14

23.51

0

U.S.

ILMN

Illumina Inc

3.99

13.49

66.71

81.10

0

U.S.

BNTX

BioNTech SE

3.11

N/A

3.51

4.57

0

Germany

BIIB

Biogen Inc

2.88

-57.50

20.45

13.59

0

U.S.

MTD

Mettler-Toledo International Inc

2.74

31.53

40.17

34.50

0

U.S.

The history of IBB didn’t start well: it suffered steep losses in 2001 and 2002, then it was unable to surpass its share price at inception until 2011. After a decade in drawdown, IBB has moderately outperformed XLV until September 2021, then it abruptly fell behind. IBB volatility is much higher than the sector benchmark. The next chart compares these two popular healthcare ETFs since January 2010.

IBB vs. XLV

IBB vs. XLV (Chart: Portfolio123)

Since inception, IBB has been lagging XLV by about 2.5 percentage points in annualized total return.

since Feb 2001

Total return

Annualized return

Max Drawdown

Sharpe ratio

Volatility

IBB

302.98%

6.80%

-62.85%

0.36

23.27%

XLV

556.29%

9.28%

-40.53%

0.6

14.59%

Data: Portfolio123

IBB is a popular product for investors seeking capital-weighted exposure to innovative healthcare companies. It is also a good instrument for tactical allocation and swing trading thanks to its high liquidity. However, it is a risky fund regarding historical drawdowns and volatility.

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 pharma/biotech company with an Earnings Yield above 0.0434 (or price/earnings below 23.04) 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.

INVA

Innoviva Inc

QDEL

Quidel Corp

COLL

Collegium Pharmaceutical Inc

HOLX

Hologic Inc

OGN

Organon & Co

DVA

DaVita Inc

ORGO

Organogenesis Holdings Inc

ITOS

iTeos Therapeutics Inc

QURE

UniQure NV

THC

Tenet Healthcare Corp

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

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