Last week, we talked a little about prices relative to the average P/E of the S&P 500 and what would be considered “cheap” or not and threw out a couple of companion names. Naturally, since we were looking for value, a healthcare name (LLY) invariably popped up. LLY is just one in particular that we’re fond of.
There’re plenty of others. Investors are treating healthcare as if it had leprosy or a rotavirus. Have you ever changed the diaper of a 9 month old with that stuff? If so, you deserve a medal.
According to Standard and Poor’s Equity Research, year to date, Health Care is the worst performing sector in the S&P 500 with having turned in a whopping 0.7% return last year. It’s also the cheapest based on 2011 estimates with a P/E of 11.8 times earnings. Performance is a little better this year with 5.7% YTD, slightly outperforming Financials, the ultimate market leper.
Pretty sick company. But why? The legislative beast known as “Obamacare”? Granted, there’s plenty of event risk lurking in the bowels of that thing. But, correct me if I’m wrong, didn’t the pharmaceutical companies make out fairly well on that deal…like…being able to control prices with their biggest customer.
How is that event risk? Maybe if it doesn’t happen, I guess. That would be non-event risk.
P/E’s are ridiculous across the board for the sector. The aforementioned, perennial favourite LLY sports a trailing multiple of 7.83 times. Biotech giant, Amgen (AMGN) trades at 11.34 times. I’ve never seen AMGN’s P/E that low in my career and I’ve been doing this long enough to say “I’ve never seen the P/E that low in my career”. Generic colossus Teva (TEVA) is priced at 13.35 times; an 18.75% discount to the S&P 500’s P/E.
And whether they’re evil incarnate or not, the insurance companies are worth a look. My co pays increased 50%…seriously…this year so…I’m sort of in that camp. Nevertheless, a bargain’s a bargain, maybe. Cigna’s (CI) and Aetna’s P/E’s float like twins at a singular digit 8.9 times trailing. WellPoint (WLP) is a bit pricier at 10 times. Now, the insurance companies, despite the bazillions they’ve thrown at congress, do face some genuine event risk. However, if Congressman Paul Ryan gets his way(doubtful), CHACHING!!!
We’ve talked about healthcare before, mainly Big Pharma. Sure there’s uncertainty but where is there NOT uncertainty in pulling the investment trigger. The numbers speak for themselves. There’s some serious value in the group. Maybe it’s time for bold investors to put on their “Outbreak” suits and go shopping in the hot zone.
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