Tag Archives: biotechnology

A Rate Hike Can Badly Hurt High-Flying Growth Stocks In Tech, Biotech

Growth companies are currently valued very richly not only because they are growth stocks but also because short-term interest rates are almost zero. Waiting for growth companies to reach their potential is inexpensive when it doesn’t incur interest payments, but that can change at any time. There is a real chance that investors will panic about growth stocks when (or before) short-term rates will be raised. Very few investors would believe that a rate hike can hurt stocks like Amazon ( AMZN ), Facebook ( FB ), Tesla ( TSLA ), Netflix ( NFLX ) and LinkedIn ( LNKD ) (or even Alphabet ( GOOG ) (NASDAQ: GOOGL ) – what used to be Google). These are some extraordinary companies. And there are many other companies, especially in the biotech sector, which can have extraordinary growth in the coming years. Very few people doubt that these names are great and will offer exceptional growth in the coming years. I’m no exception – I believe that the mentioned companies, and many other smaller ones, will offer great revenue and income growth over the coming years. But if you look at their valuations Facebook seems to be a bargain, with a respectable trailing P/E of 100. Amazon, Tesla, Netflix and LinkedIn don’t really make any meaningful profits and their valuations are based on their potential alone. And there are many such companies, smaller and less known ones, which are solely valued according to their potential, especially in the biotech sector. Stocks can be quite vulnerable to short-term interest rates because there are very easy ways, for pretty much everyone, to own stock on leverage nowadays without paying much in interest. Other assets are a lot more complicated to own just based on short-term interest rates, as they are quite illiquid, and intermediaries – especially banks since the financial crisis – are not willing to lend at low rates. Therefore it’s not common to see such optimistic valuations anywhere, nowadays, other than in the so-called growth stocks. I am saying “so-called” not because I do not believe they are growth stocks, especially the ones I named, but because the whole idea behind “growth” is subjective and based on popular perception. I don’t remember many people calling Amazon a growth stock 10 years ago. But it was a growth stock even back then, however not popular at all. Just take a look at two charts below, the first one of Amazon, and the second one from the Nasdaq Biotechnology Index ( NBI ). Both Amazon and the biotechnology sector were considered to have growth potential 10 years ago, but their shares were very unpopular. What has happened in the meantime that has made such stocks so popular? Money has become very cheap, and the time value of short-term money has become almost zero, especially if you have access to large sums and you can practically leverage up at almost no cost. This phenomenon was true since 2009, but it truly started to affect the growth sector in 2013. Why 2013? Between 2009 and 2013 there had been too many nasty surprises, especially with the real estate market and then with the European crisis. Probably investors, and particularly hedge funds, started to think that zero interest rates were a safe bet as long as you went for growth stocks. They apparently offered no nasty surprises. And they haven’t offered nasty surprises ever since the crash in year 2000 actually. With hindsight it seems very easy to understand that if you can borrow at practically no cost there is no problem to wait. So, why not bet for companies which offer “certain” growth for at least 5 to 10 years in the future? This way, with some good hedging in place for short-term fluctuations, a hedge fund could do quite well in the longer term. Now the market has become complacent, evaluating growth companies as if short-term interest rates are a sure thing forever. If this changes, it will catch many by surprise. Even the belief that the Fed is certain to raise rates might panic those who are in the so-called growth stocks. But this is to be seen. What is for sure is that very expensive and fashionable growth stocks are not exactly the safe bet they are believed to be. The companies behind the stocks will likely continue to do well, but there is good chance that their current out-of-touch valuations will be a thing of the past, at least for a while. Amazon and Facebook, for example, are truly great companies. They have exceptional management and they have pretty much built monopolies. But they are currently making very little profits to justify their huge valuations. Does anybody know how much they will make in 5 or 10 years? I personally think that Facebook is likely to make $10 billion perhaps in 5 years – for fiscal year 2020. But it’s valued at almost $300 billion now. When will it make $20 billion in a year to justify its current capitalization? In 2025? It is quite possible, though not certain at all. But that is 10 years from now. It is OK to wait if you don’t pay any interest on your money, but if there will be interest to pay things will change. And as any experienced investor knows, when things change course in the stock market it usually happens suddenly and dramatically. The situation is even more serious in the case for Amazon. Amazon is a great company, but one of the reasons it has such extraordinary growth right now is because it doesn’t care about profits. Investors don’t really want to own shares in a company where the management doesn’t care about profits. So they will ask for profits in case the stock will go down – and it won’t be so popular any more. Will Amazon stock be so popular by continuing to offer great service to its customers but almost nothing to its shareholders? Of course this is considered to be a temporary thing, but it is anybody’s guess how much money Amazon will be able to make when it will consider that it has grown enough to start making some real money. It’s also anybody’s guess whether those online merchants whom Amazon will not have killed off by then will not take away its apparently loyal customers. Will Amazon users/customers/members will still stick around in case other online shops will offer better deals? It’s simply anybody’s guess. But in today’s zero short-term interest rates many investors seem not to mind waiting. And this zero short-term rate environment can change soon. And all this waiting has resulted in some too optimistic evaluations for companies which have been able to offer growth for some years now, as if the future is a certainty – which it never is.

Valuation Dashboard: Healthcare – November 2015

Summary 4 key factors are reported across industries in the Healthcare sector. They give a valuation status of industries relative to their history. They give a reference for picking stocks in each industry. This article is part of a series giving a valuation dashboard by sector of companies in the S&P 500 index (NYSEARCA: SPY ). I follow up a certain number of fundamental factors for every sector, and compare them to historical averages. This article is going down at industry level in the GICS classification. It covers Healthcare. The choice of the fundamental ratios has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. A link to a list of individual stocks to consider is provided at the end. Methodology Four industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). They are compared with their own historical averages “Avg”. The difference is measured in percentage for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name (for example D-P/E for price/earnings). The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and size biases, which is necessary when going out of a large cap universe. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. Industry valuation table on 11/2/2015 The next table reports the 4 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference as explained above. So there are 3 columns for each ratio. P/E Avg D- P/E P/S Avg D- P/S P/FCF Avg D- P/FCF ROE Avg D-ROE HC Equipment&Supplies 34.5 27.18 -26.93% 4.12 3.18 -29.56% 45.64 30.51 -49.59% -20.09 -12.14 -7.95 HC Providers&Services 28.81 20.88 -37.98% 1.09 0.85 -28.24% 22.4 17.75 -26.20% 7.46 5.78 1.68 HC Technology* 56.41 56.13 -0.50% 4.11 3.39 -21.24% 32.35 35.77 9.56% -15.66 -6.2 -9.46 Biotechnology 47.8 39.78 -20.16% 50.92 29.01 -75.53% 41.33 43.74 5.51% -62.42 -64.42 2 Pharmaceuticals 32.96 26.26 -25.51% 12.28 8.25 -48.85% 29.82 32.55 8.39% -38.03 -30.3 -7.73 Life Sci. Tools&Services* 31.78 29.52 -7.66% 2.89 3.39 14.75% 32.39 27.28 -18.73% -8.87 -18.37 9.5 * Averages since 2006 Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Price/Free Cash Flow: Quality Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF (NYSEARCA: XLV ) with SPY (chart from freestockcharts.com). It also includes the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) and the SPDR S&P Pharmaceuticals ETF (NYSEARCA: XPH ) as industry benchmarks. (click to enlarge) Conclusion The broad Healthcare ETF has almost the same return as SPY in the last 6 months, with large discrepancies between industries. The biotechnology index has underperformed by about 4%, the pharmaceutical index by about 14%. Two series of news have hit the latter: political announcements on overpriced legacy drugs initiated by Mrs Clinton, then suspicions of unduly inflated sales involving specialty pharmacies. Valeant Pharmaceuticals Intl (NYSE: VRX ) is at the core of both cases, but the market has punished most names linked to generic drugs and specialty pharmaceutical products. As it includes hedge fund darlings, an ETF replicating famous managers’ holdings has also suffered from this: the AlphaClone Alternative Alpha ETF ( ALFA). Taking into account valuation charts above, all healthcare industries look overpriced. There is no contradiction with the positive value score reported for Healthcare in my latest S&P 500 sector dashboard . Here, mid and small caps have been added in calculations. It is a clue of a significant discrepancy between market cap segments inside the sector. The most influential valuation factor from a statistical point of view is P/FCF, and it is more optimistic than other ratios. It points out to a slight under-pricing in 3 industries: Healthcare Technology, Biotechnology and Pharmaceuticals. However, there may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in Healthcare beating their industry factors is provided on this page . If you want to stay informed of my updates, click the “Follow” tab at the top of this article. You can choose the “real-time” option if you want to be instantly notified.

The First Cancer Immunotherapy ETF

Investors can target immunotherapy cancer treatment companies through a new ETF. A look at the Loncar Cancer Immunotherapy ETF. Provides exposure to a quickly growing segment of the biotechnology space. With the advancements in biotechnology generating some attractive investment opportunities, exchange traded fund investors may now focus on a group of companies that specialize in the growing field of cancer immunotherapy. The Loncar Cancer Immunotherapy ETF (NasdaqGM: CNCR ) began trading Wednesday, October 14, according to a press release . CNCR has a 0.79% expense ratio. “Immunotherapy is changing the way many cancers are being treated,” Brad Loncar, Chief Executive Officer of Loncar Investments, said in the press release. “This innovative field within biotechnology is expected to become the foundational treatment for cancer over the next ten years. We think it is important to give investors a benchmark to track the progress of this growing biotechnology sector, which over time will likely continue to have a positive impact on society.” CNCR tries to reflect the performance of the Loncar Cancer Immunotherapy Index, which was developed by biotechnology investor Brad Loncar. The underlying index tracks large pharmaceutical and growth-oriented biotechnology companies in the cancer treatment space. Specifically, the index tracks companies that are developing new classes of therapies, like checkpoint inhibitors, next generation vaccines and chimeric antigen receptor (CAR) technologies. “Biotech stocks tend to get grouped together as a whole, yet areas like immunotherapy trade on their own unique circumstances and innovations,” according to Loncar Investments. “While traditional medicines like chemotherapies often give cancer a broad punch, the benefit of using immunotherapy is derived from the immune system’s dynamic nature and the way it can more precisely be tailored to fight a patient’s disease.” The underlying index first selects seven top large pharmaceutical companies working on immunotherapy for their strategic focus on cancer treatment and their leadership role in the field. Additionally, the index picks the top 23 growth biotechnology companies in immunotherapy by market capitalization. The cancer index is then equally weighted. The index also screens companies for a number of factors, including drugs approved by either the FDA or EMA that harness the immune system to fight cancer, drugs in the human stage of testing that harnesses the immune system, intentions to begin human stage testing of a drug that harnesses the immune system to fight cancer, or announcement of an immunotherapy collaboration or partnership with a major pharmaceutical company. Top holdings include Ziopharm Oncology (NASDAQGS: ZIOP ) 4.9%, Kite Pharma (NASDAQGS: KITE ) 4.7%, Celgene (NASDAQGS: CELG ) 4.7%, Pfizer (NASDAQGS: PFE ) 4.5% and Bristol-Myers (NASDAQGS: BMY ) 4.4%. “The Loncar Cancer Immunotherapy ETF allows investors to participate in the breakthrough in this well-defined sector in a diversified way,” J. Garrett Stevens, CEO of Exchange Traded Concepts, said in the press release. A cancer-themed ETF is not new to the ETF industry. Previously, ETF investors could tap into this segment of the biotech industry through the HealthShares Cancer ETF ( HHK ), but the fund closed in 2008. Additionally, XShares, the fund provider of the HealthShares line, was sold to a unit of Deutsche Bank in 2010. Max Chen contributed to this article . Disclosure: None.