MorningWord 11/5/14: Outliers in an Outlier $XLV $CELG $GILD

by Dan November 5, 2014 10:04 am • Commentary

For the second year in a row, Healthcare is leading the pack by way of sector leadership:

US sector performance ytd from Seeking Alpha
US sector performance ytd from Seeking Alpha

The chart of the XLV over the last three years is a work of art, up about 110% from the Nov 2011 low.  For the first time since Dec 2011, it actually touched its 200 day moving aveage (yellow line) in October:

XLV 3 yr chart from Bloomberg
XLV 3 yr chart from Bloomberg

What’s fascinating about the recent breach of the 200 day moving avergae was first the brevity, only one close below, and then the violent reversal.  The etf is now up almost 14% from the October lows and likely the farthest from the momentum measure in some time.

Looking at the make up of the etf, it is clear that the XLV is not exactly speculative biotech.  The largest component is Johnson & Johnson at almost 12%, with predominantly large cap pharma rounding out the top 10 holdings.  They make up about 55% of the weight of the etf:

XLV top 10 holdings per Bloomberg
XLV top 10 holdings per Bloomberg

Of those holdings, there are two stocks that stood out to me, CELG and GILD, up 26% and 46% respectively in 2014.  CELG has an $85 billion market cap, with GILD nearly double at $165 billion.  CELG trades at 22x next year’s expected earnings that analysts see growing at 31% with sales growth of 21%.  Not bad at all, but where can the stock really go from here?? I have no idea what drug approval/roll out the current stock price includes, but up 260% from the late 2011 lows, I think the outperformance likley incorporates a good bit of positive news:

CELG vs XLV 3yr chart from Bloomberg
CELG vs XLV 3yr chart from Bloomberg

As for GILD, which is the best performer in the top 10 of the XLV, the stock trades 11x n ext years expected earnings that should grow 25% on expected sales growth of 17%.  Again looks a bit cheaper than CELG, but also, the stock has gained nearly the entire market cap of CELG this year alone.

Despite the fact that valuation on both stocks looks very reasonable, especially relative to expected growth, it is important to note that they appear to be crowded trades where the sentiment is overly zealous.  What has worked in an easy money market may not work when the calendar changes to 2015, particularly if the fundamentals don’t remain stellar to support the steep uptrends.

GILD seems to be struggling with the breakout to new highs from the other day, and I would suggest that for those looking for a long entry, you may want to be patient and look for an entry closer to last month’s lows:

GILD 1yr chart from Bloomberg
GILD 1yr chart from Bloomberg

As for CELG I would probably look for a long entry (if predisposed to do so) back towards the breakout from last month closer to $96:

CELG 1yr chart from Bloomberg
CELG 1yr chart from Bloomberg

Having said all this, the health care sector remains one of the few sectors where valuations remain reasonable in relation to growth prospects.  Contrast that to utilities and consumer staples, where valuations are similar to actually higher, with growth prospects much lower.