A Bull Call On A Marquee Healthcare ETF

As was widely documented, the healthcare sector languished last year thanks in large part to presidential election rhetoric in which both candidates excoriated biotechnology and pharmaceuticals for high drug prices.

The Health Care SPDR (ETF) (NYSE: XLV), the largest healthcare exchange-traded fund by assets, finished 2016 in the red, notching its first negative performance on an annual basis since 2008. The iShares NASDAQ Biotechnology Index (ETF) (NASDAQ: IBB) also slumped last year and in significantly worse fashion than diversified healthcare ETFs such as XLV.

Although both ETFs finished lower last year, IBB and XLV were on the receiving end of investors' assets. In 2016, IBB and XLV added over $1.8 billion in new assets combined. Some analysts believe that faith in healthcare ETFs could soon be rewarded.

Reconsidering XLV

In a recent note, AltaVista Research tagged XLV with an Overweight rating.

“Typically, funds in this category consist of stocks trading at attractive valuations and/or having above-average fundamentals,” said the research firm.

Perhaps part of the bullish thesis surrounding XLV and healthcare at large is that election year rhetoric was an albatross on the sector and, obviously, the U.S. presidential election is in investors' rear view mirrors.

AltaVista rates each of the 10 sector SPDR ETFs and XLV is the only one the research firm currently rates Overweight. Conversely, AltaVista rates six of the sector SPDR ETFs Underweight.

XLV's top four holdings, a quartet representing almost 31 percent of the ETF's, are all members of the Dow Jones Industrial Average. Biotechnology is XLV's second-largest industry weight, behind pharmaceuticals, at 20.5 percent. Three of XLV's top 10 holdings are biotech stocks.

AltaVista On XLV

AltaVista has an estimated 2017 price-to-earnings ratio of 14.8 on XLV, below the estimated multiple of 17.2 for the S&P 500. XLV is one of just three sector SPDRs that carry lower estimated P/E ratios from AltaVista than the S&P 500.

“Until the decline in biotech shares dragged the sector's overall P/E down, investors had been revaluing Health Care stocks with steadily higher multiples since late 2011. Perhaps the recent pullback in valuations (P/E, P/BV) reflects the declining trend in Return on Equity. But are investors overreacting? Multiples are near their lowest level in years resulting in the highest rating for any sector, and our only OVERWEIGHT recommendation,” said the research firm.