While there has been a rotation from defensives to cyclicals in the past month, health care is still the best performing sector in the U.S. market this year (up about 22% when measured by XLV). The XLV broke out to a new all-time high yesterday after a one-month consolidation period. The 1 year chart shows that the stock hasn’t even come close to testing its 50 day moving average (in pink, 200 day ma in black) throughout 2013 – a very strong trend:
As the best-performing sector, how do the component companies of XLV look from a valuation perspective?
Here is a quick rundown of the top 10 components:
- JNJ – Largest component ($250 billion market cap). Following the ETF quite closely, up about 22.5% in 2013. JNJ has expected earnings growth of 6%, is a 16 P/E, and pays a 3% dividend.
- PFE – $210 billion market cap, up 19% in 2013. Expected earnings growth of 4%, 13 P/E, and pays a 3.25% dividend. My longer-form thoughts on PFE are in this post.
- MRK – $140 billion market cap, up 12.5% in 2013. Flat expected earnings over the next 2 years, 13 P/E, pays a 3.75% dividend. Lack of pipeline growth has caused it to underperform.
- GILD – Biotechs have been the real winners. $83 billion market cap, up around 50% in 2013. It’s a 30 P/E name, with only 5% expected earnings growth in 2013, but it’s projected to grow earnings 45% in both 2014 and 2015, and projected to earn $4.33 in 2015. No dividend.
- AMGN – $80 billion market cap, up 24% in 2013. It’s a 16.5 P/E name expected to grow earnings 12% over the next 2 years, and pays a 1.75% dividend.
- ABBV – Spinoff from Abbott Labs. $70 billion market cap name, up 30% in 2013. 14 P/E name projected to grow earnings 5% in the coming years. 1.8% dividend yield.
- BMY – $67 billion market cap, up 24% in 2013. 25 P/E name projected to grow earnings only 3% over the next couple years. 3.5% dividend yield.
- UNH – $64 billion market cap health insurer, up 15% in 2013. It’s a 12 P/E name projected to grow earnings 5% in the next 2 years, and pays a 1.4% dividend. My longer-form thoughts on UNH are posted here.
- LLY – $63 billion market cap pharma name, up 14% in 2013. It’s a 15 P/E stock, projected to have relatively flat earnings over the next few years. Sports a 3.5% dividend yield
- CELG – Another big biotech winner. Up 65% in 2013, quite a run for a (now) $54 billion market cap. Forward P/E of 23 with projected earnings growth over the next few years of 20-25%. No dividend.
A few key takeaways for me:
- The biotech stocks still look the most appealing IF those earnings projections hold up to be true. Their valuations are not too stretched, and in fact look better than most of the big pharma names.
- MRK, BMY, and LLY are pure dividend plays, but their earnings profiles look dismal, and I don’t see why you would rather buy those than own AMGN or ABBV for a similar valuation, but some semblance of earnings growth.
- UNH valuation looks depressed relative to the rest of the group, likely due to government regulation uncertainty. But it’s close to a long-term breakout to new all-time highs if it can breach $64.50.
Not all health care is created equal. Particularly given this year’s rally in the sector, it pays to get more discerning as the rising tide has lifted all boats.