Best And Worst Q4’15: Health Care ETFs, Mutual Funds And Key Holdings
Summary The Health Care sector ranks ninth in Q4’15. Based on an aggregation of ratings of 23 ETFs and 61 mutual funds. IXJ is our top-rated Health Care sector ETF and FSHCX is our top-rated Health Care sector mutual fund. The Health Care sector ranks ninth out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Health Care sector ranked fifth. It gets our Dangerous rating, which is based on an aggregation of ratings of 23 ETFs and 61 mutual funds in the Health Care sector. See a recap of our Q3’15 Sector Ratings here . Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Health Care sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 24 to 353). This variation creates drastically different investment implications and, therefore, ratings. Investors should not buy any Health Care ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Live Oak Health Sciences Fund (MUTF: LOGSX ) and the Saratoga Advantage Trust: Health & Biotechnology Portfolio (MUTF: SBHIX ) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums. The iShares S&P Global Healthcare Index Fund ETF (NYSEARCA: IXJ ) is the top-rated Health Care ETF and the Fidelity Select Medical Delivery Portfolio (MUTF: FSHCX ) is the top-rated Health Care mutual fund. Both earn a Neutral rating. BioShares Biotechnology Products (NASDAQ: BBP ) is the worst-rated Health Care ETF and Rydex Series Biotechnology Fund (MUTF: RYBOX ) is the worst-rated Health Care mutual fund. Both earn a Very Dangerous rating. 338 stocks of the 3000+ we cover are classified as Health Care stocks. HCA Holdings (NYSE: HCA ) is one of our favorite stocks held by Health Care ETFs and mutual funds and earns our Very Attractive rating. Since 2012, HCA has grown after-tax profit ( NOPAT ) by 5% compounded annually. HCA earns an impressive top-quintile return on invested capital ( ROIC ) of 15%. This high profitability has allowed HCA to become the largest hospital operator in the world. However, HCA shares are priced as if the company will see a significant decline in profits going forward. At its current price of $69/share, HCA has a price to economic book value ( PEBV ) ratio of 0.8. This ratio implies that the market expects HCA’s NOPAT to permanently decline by 20%, in spite of the profit growth achieved the past four years. If HCA can grow NOPAT by just 5% compounded annually over the next five years , the stock is worth $123/share today – a 78% upside. Athenahealth (NASDAQ: ATHN ) is one of our least favorite stocks held by Health Care ETFs and mutual funds and was put in the Danger Zone in April 2015. Since 2011, athenahealth’s NOPAT has declined by 43% compounded annually. Over the same timeframe, ROIC has fallen from 14% to a bottom quintile 0%. The biggest issue at athenahealth remains its inability to grow the business and rein in costs. However, as we’ve seen with other Danger Zone companies, investors have overlooked athenahealth’s problems by focusing on revenue growth, which has left ATHN overvalued. To justify its current price of $149/share, athenahealth must grow NOPAT 37% compounded annually for the next 23 years . This expectation seems rather optimistic given the sustained profit decline since 2011. Figures 3 and 4 show the rating landscape of all Health Care ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, sector or theme.