The Best And Worst Of The Health Care Sector 3Q16 by Kyle Martone

Health Care Sector Analysis 3Q16

The Health Care sector ranks sixth out of the ten sectors as detailed in our 3Q16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Health Care sector ranked seventh. It gets our Neutral rating, which is based on aggregation of ratings of 22 ETFs and 88 mutual funds in the Health Care sector as of July 12, 2016. See a recap of our 2Q16 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 23 to 357). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Health Care sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Figure 1: ETFs with the Best & Worst Ratings – Top 5

Health Care Sector 3Q16

* 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

Health Care Sector 3Q16

* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Live Oak Health Sciences Fund (LOGSX) and Saratoga Health & Biotechnology Portfolio (SBHIX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

iShares Global Healthcare ETF (IXJ) is the top-rated Health Care ETF and Putnam Global Health Care Fund (PHSYX) is the top-rated Health Care mutual fund. Both earn an Attractive rating.

BioShares Biotechnology Products Fund (BBP) is the worst rated Health Care ETF and Hartford Healthcare Fund (HGHAX) is the worst rated Health Care mutual fund. Both earn a Very Dangerous rating.

347 stocks of the 3000+ we cover are classified as Health Care stocks, but due to style drift, Health Care ETFs and mutual funds hold 357 stocks.

National Research Corp (NRCIB: $34/share) is one of our favorite stocks held by Health Care ETFs and mutual funds and earns a Very Attractive rating. NRCIB is on July’s Most Attractive Stocks list. Over the past decade, NRCIB has grown after-tax profit (NOPAT) by 14% compounded annually. The company has improved its return on invested capital (ROIC) from an already impressive 18% in 2005 to a top-quintile 26% over the last twelve months. Despite the improving business, NRCIB remains undervalued. At its current price of $34/share, NRCIB has a price-to-economic book value (PEBV) ratio of 0.6. This ratio means that the market expects NRCIB’s NOPAT to permanently decline by 40% from current levels. If NRCIB can grow NOPAT by just 8% compounded annually for the next five years, the stock is worth $73/share today – a 115% upside.

Boston Scientific Corp (BSX: $24/share) is one of our least favorite stocks held by HGHAX and earns a Dangerous rating. Over the past decade, Boston Scientific’s NOPAT has declined by nearly 3% compounded annually. The company’s ROIC has fallen from 24% in 2005 to a bottom-quintile 4% over the last twelve months. Worst of all, the company has generated negative economic earnings in every year since 2006. Despite these issues, BSX remains overvalued. To justify its current price of $24/share, BSX must grow NOPAT by 12% compounded annually for the next 13 years. This expectation seems overly optimistic given the past decade of declining profit.

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

Health Care Sector 3Q16

Sources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds

Health Care Sector 3Q16

Sources: New Constructs, LLC and company filings

This article originally published here on July 12, 2016.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.