Pharmaceuticals stocks and exchange traded funds are performing well this year, but some pharmaceuticals ETFs are lagging the performances turned in by broad, diversified healthcare funds. Still, investors should be dismissive of pharmaceuticals investments and their potential to deliver upside in the second half of 2017.
The PowerShares Dynamic Pharmaceuticals Portfolio (NYSEArca:PJP) could be a leader should pharmaceuticals ETFs regain their momentum.
PJP is a departure from the traditional market capitalization-weighted health care ETF in that its underlying index evaluates companies for inclusion based on “price momentum, earnings momentum, quality, management action, and value,” according to PowerShares. Translation: PJP is a smart beta play on an industry group that is mostly capitalization-weighted in the world of ETFs.
“The pharmaceutical industry has lagged in recent years, due in part to political uncertainty, which has kept a lid on company share prices,” said PowerShares in a recent note. “Provided lawmakers can produce the votes, the proposed House and Senate health care bills could ease some of that uncertainty — setting up a possible ‘sell the rumor, buy the fact’ backdrop, as investors move beyond market noise and focus on company fundamentals. With uncertainty already priced in, I believe that the pharmaceutical industry could finally be poised for a breakthrough if current trends hold.”
The pharmaceutical and biotechnology sub-sectors may benefit under a Republican president and Congress as the industries are less at risk of price controls that Democrats vowed to impose.
Related: Is it Time to Consider Value ETF Investing Again?
Market observers are growing more bullish on the sector as a Republican-led Congress and administration could enact reforms to free cash held overseas for tax reason by large U.S. pharmaceutical companies, which could pave the way for increased acquisitions in the sector. The White House is also looking to help the Food and Drug Administration (FDA) expedite new drug approvals, which could serve as a major catalyst for the biotechnology space.
“Pharmaceutical stocks are cheap. In fact, the PowerShares Dynamic Pharmaceuticals Portfolio (PJP), which comprises stocks of 30 US pharmaceutical companies, is trading at a discount to the S&P 500 Index and is the cheapest since 2009, when the post-financial crisis rally began,” adds PowerShares. “PJP is priced at just 12 times forward earnings per share — a sizeable discount to the S&P 500’s forward price-to-earnings ratio of 17.64 — while the price-to-expected sales ratio is at 2009 levels, which could pave the way for price appreciation potential.”
For more on smart beta ETFs, please visit our Smart Beta Channel.