At one point last year I was with a zero weight in the overvalued healthcare sector.
What is notable about this is being zero weight in a ‘defensive’ sector even though the market was overvalued and my strict policy is against taking big sector bets.
With the Nasdaq Biotechnology Exchange Traded Fund (IBB) dropping from $400 to $325 in the last 12 weeks it was time to take another look, but even then the sector appeared overvalued although several names that were harmed without justification in the sector purge were making a short list of stock to watch.
Running 150 healthcare names through a 155-variable computer model based on Nov. 11 closing prices reveals where there is value in this sector (see “Diagnosing a sector”).
We only looked at names with a greater than $400 million market cap that are expected to be profitable in 2016 (with exceptions CSU, ALKS and PODD). All names in this report have a five-year history, share price above $9 and trade at least 100,000 shares a day.
If you are looking for value, it will be difficult to find it here, as 85% of the 150 names are trading above 14X speculative estimates for next year.
Remember, the more than 100 healthcare sector names (mainly biotech) that are unprofitable are not included in this report.
We currently have four open recommendations (out of 91 overall) in this sector: KITE, MYL, TEVA & MR.
I recently exited UTHR and JUNO. MR has been taken over but I have not yet exited. JUNO and KITE are not included in the attached report. The computer rankings (out of 150 names) for MYL, TEVA, UTHR, ANIP and ENDP are 8, 26, 1, 19 & 84, respectively.
The market is in a bit of a panic as Democratic presidential hopefuls Hillary Clinton and Bernie Sanders threaten to crack down on high drug prices. It is impossible to know how this shakes out. It is basically a crap shoot now trying to forecast earnings for these names and what if any drug price cuts will pass through a couple of years from now if one of them is elected.
One way to play this is by shorting the still overvalued Nasdaq Biotechnology ETF (IBB) or going long the Inverse Biotech ETF (BIS) while going long select low P/E names.
There are a few names trading below 14X but some of these are value traps and/or heavily shorted and/or could be targeted in 2017 by a new administration.
The selling at timers seems to be indiscriminate. There are a few babies being thrown out with the bathwater and it may be worth looking at a few of these low P/E names. In any event, I would remain underweight here.