Short biotech

November 24, 2015 10:00 AM

The iShares Nasdaq Biotechnology ETF (IBB) could  go to $250-$275 based on comments by Hillary Clinton highlighting a proposal to cap costs on certain prescription drugs. One way to play this is via the double inverse biotechnology ETF BIS (see “Leveraged downside”). 

At one point last year we had a zero weighting on the overvalued healthcare sector. What is notable about this is that healthcare is a defensive sector, which usually performs well in overvalued market conditions like what we  saw last year. With IBB dropping from $400 to $300 in the last two months, it was time to take another look at the sector. After a review where we ran 150 healthcare names through our 155-variable computer model in late September, it still appeared to be overvalued (see “Healthcare check-up”). 

Since the market top two months ago more than 90% of the names in this sector are down and two-thirds are down by double-digits. Half of the names are still trading above 18X speculative estimates for next year and that is only looking at names that are profitable.

Even the mega-caps still look stretched on valuation with P/E ratios in the high teens/low 20s. Mega cap healthcare firms used to trade at a 12X multiple in the stock market--not sure how we got to 18X to 24X.

We looked at healthcare firms with a market cap above $600 million that are expected to be profitable in 2015-2016, trading more than 100,000 shares per day on average with a five-year history and share price above $12. If you are looking for value, it will be difficult to find it here as 90% of the 150 names are trading above 14X speculative estimates for next year. 

We recommend five out of 150 in this sector: Juno Therapeutics Inc. (JUNO), Kite Pharma, Inc. (KITE), Mylan N.V. (MYL), Teva Pharmaceutical Industries Ltd. (TEVA) and Mindray Medical Intl. Ltd. (MR). JUNO, KITE and MYL were initiated in August when the 
market collapsed. 

One way to play the overvalued healthcare sector is by shorting IBB or going long the inverse biotech ETF (BIS) and going long the low P/E names. There are a few, including MYL and TEVA trading below 14X.

While there are a few gems mentioned above, the sector as a whole presents a good selling opportunity or at the least should be under-weighted.

About the Author

Ronnie Moas is the founder and director of research at Standpoint Research. TipRanks recently ranked Ronnie #1 in a ranking of 3,500 analysts evaluating more than 400 of his recommendations since 2008. Ronnie Ideas are generated by a 155-variable computer model after heavy fundamental and subjective overlays are applied. Ronnie is also the founder of philanthropyandphilosophy.com. Research free trial at StandpointResearch.com @RonnieMoas