As the third quarter of 2017 comes to an end, a rear view glance in the mirror shows the Healthcare Sector (XLV) has endured the overhanging clouds of the campaign to repeal and replace ObamaCare, which, by the way, continues to fail. Rather than delve into the political nuances of why the bill did not pass, let’s focus on the market condition for its underlying constituents. The XLV is comprised of 64 individual stocks and its top 15 holdings by ownership percentage weighting represent almost 2/3 of the entire fund. Needless to say, these are the stocks that move the needle on its performance gauge and they will be the focus of today’s post. (See table below for analysis)
A closer look underneath the hood reveals the fund is heavily weighted towards the Big Pharma (33.89%) and Biomedical (13.58%) industries. Both of these (i.e. 10 stocks) have the highest returns on equity (ROE) and comprise 47.47% or almost half of the fund’s entire holdings and have the momentum of a bull market behind them. Overall relative strength remains high as the industries of Medical Instruments and HMO’s lead all others. In terms of valuation, the top 15 holdings or 64% of the XLV’s portfolio capital trades at 17.9 times trailing 12 months’ earnings vs the SP-500 index PE @ 25, while dividends yields are on par with the benchmark equity index. 10 out of 15 its stocks offer superior yields to the SP-500 and this alone gives an added layer of price support to the ETF itself as well as its individual holdings.
In summary, the healthcare industry has demonstrated remarkable price resiliency, along with competitive valuations and other performance metrics. Hillbent’s investment bias towards the group remains bullish and, while anticipating some price consolidation of its gains, any pull backs in price should considered opportunities for capital allocation if one is underweight or has no exposure to this investment theme.