Prompted by the retrenchment in biotechnology stocks, healthcare exchange traded funds have recently given up some ground. Focused and tactical healthcare funds are no exception, but that does not mean investors should ignore these offerings.
With its lofty valuations and arguably even loftier takeover premiums, biotech commands plenty of attention within the healthcare space, but there are other opportunities to consider, including the equipment and supplies industry.
“S&P Capital IQ sees positive longer-term fundamentals for the health care equipment & supplies industry, including increasing demand for quality health care, an aging population and rising R&D outlays, leading to a steady flow of new diagnostic and therapeutic products. Further, improving U.S. regulatory approval trends serve as a catalyst, spurring new potential revenue streams. Lastly, we believe there are a number of companies that could be candidates for takeover in the consolidating industry,” said the research firm in a note out Thursday.
The PowerShares S&P SmallCap Health Care Portfolio (NasdaqGS: PSCH), one of this year’s top-performing healthcare ETFs with a gain of 12%, grants investors one-stop shopping to small-cap equipment and supplies names as the $210 million ETF allocates 36.3% of its weight to that healthcare sub-sector. [Healthcare ETFs up at Least 10% This Year]
As S&P Capital IQ notes, investors will pay up on valuation to access healthcare equipment and supplies firms, but earnings growth mutes the valuation risk.
“The S&P 1500 health care equipment & supplies industry trades at 20.5 times 2015 earnings, a slight P/E premium to the broader index’s 18.2 times. However, with 8.8% earnings growth in 2014 and a projected 14% in 2015 according to Capital IQ, the industry is growing much faster than S&P 1500’s 4.9% and 5.8%, respectively,” according to the research firm.
Two of PSCH’s 71 holdings – Haemonics (NYSE: HAE) and Masimo (NasdaqGS: MASI) – are considered undervalued by S&P Capital. Those stocks combine for over 4% of PSCH’s weight. PSCH also merits consideration as a strong seasonal play.
Since 1995, healthcare members of the S&P SmallCap 600 have posted solid gains in the parts of the year that are traditionally weak for the broader market. S&P Capital IQ has a market weight rating on PSCH. [Buy These Small-Cap ETFs in May]
PowerShares S&P SmallCap Health Care Portfolio
