Broader health care exchange traded funds have are rebounding from the late first quarter/early second quarter declines brought on by the biotechnology sell-off.
The health care sector, the S&P 500’s third-largest sector weight behind technology and financial services, remains fundamentally sound, but investors may want to temper expectations of out-sized near- to medium-term gains.
“Profit growth it is forecast to rebound this year on better-than-usual sales growth. However, P/E multiples have risen considerably over the last two years as the Health Care sector has been revalued by investors, and multiples now exceed their pre-crisis levels. Higher share prices have in turn diminished the sector’s attractiveness to slightly below average in our opinion,” said AltaVista Research in a new research note.
Valuation is not an unfamiliar concern facing health care stocks and the relevant exchange traded funds. In February, several weeks before the biotech sell-off started in earnest, the Health Care Select Sector SPDR (NYSEArca: XLV) was seen sporting a P/E ratio slightly in excess of the Consumer Staples Select Sector SPDR (NYSEArca: XLP). [Health Care ETFs Dealing With High Valuations]
That was the first time in eight years health care stocks were more expensive than staples. Although it was not among the nearly 220 ETFs that hit new 52-week highs Monday, XLV, the largest health care ETF, is higher by nearly 4% over the past month. The ETF closed at $59.87 Monday, just 63 cents below its 52-week high.
AltaVista rates XLV neutral, indicating average appreciation potential. That is the rating the research firm assigns to the bulk of the 800 ETFs in its coverage universe.
AltaVista estimates XLV’s 2014 P/E to be 17.3 with a book value of 3.4, but sees those numbers falling to 15.5 and 2.9 in 2015.
XLV is attractive on other fundamental metrics as well. For example, the average payout ratio of the ETF’s constituents is just 28.8% while net margins are expected to rise this year and next year, according to AltaVista data.
While XLV does allocated 18.6% of its weight to biotech stocks, the ETF has remained firm due to its exposure to blue chip pharmaceuticals stocks. Johnson & Johnson (NYSE: JNJ) and Merck (NYSE: MRK) are two of just six members of the Dow Jones Industrial Average with double-digit year-to-date gains. [Key Differences Among Sector ETFs]
Additionally, XLV could be worth evaluating now because the ETF is historically the second-best of the nine sector SPDRs in the month of June, though the gains are usually small. [Sector ETF Ideas for June]
Health Care Select Sector SPDR
