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The Health Care sector ranks seventh out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Health Care sector ranked sixth. It gets our Dangerous rating, which is based on aggregation of ratings of 22 ETFs and 80 mutual funds in the Health Care sector. See a recap of our Q1’16 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 351). 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 Click to enlarge * 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 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Saratoga Advantage Health & Biotechnology Portfolio (SBHIX, SHPCX) and Live Oak Health Sciences Fund (MUTF: LOGSX ) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. iShares Global Healthcare ETF (NYSEARCA: IXJ ) is the top-rated Health Care ETF and Schwab Health Care Fund (MUTF: SWHFX ) is the top-rated Health Care mutual fund. IXJ earns an Attractive rating and SWHFX earns a Neutral rating. BioShares Biotechnology Products Fund (NASDAQ: BBP ) is the worst rated Health Care ETF and Alger Health Sciences Fund (MUTF: AHSAX ) is the worst rated Health Care mutual fund. Both earn a Very Dangerous rating. 354 stocks of the 3000+ we cover are classified as Health Care stocks. Gilead Sciences (NASDAQ: GILD ) is one of our favorite stocks held by IXJ and earns a Very Attractive rating. Gilead has built a highly profitable business in the biotech industry and has grown after-tax profit ( NOPAT ) by an impressive 39% compounded annually since 2005. Over the same time frame, Gilead has increased its return on invested capital ( ROIC ) from an already high 37% in 2005 to a top-quintile 88% in 2015. Over the past five years, Gilead has generated a cumulative $26 billion in free cash flow. Despite the operational successes, GILD remains undervalued. At its current price of $98/share, GILD has a price-to-economic book value ( PEBV ) ratio of 0.6. This ratio means that the market expects Gilead’s NOPAT to permanently decline by 40%. However, if Gilead can grow NOPAT by just 4% compounded annually for the next five years , the stock is worth $181/share today – an 85% upside. Eli Lilly (NYSE: LLY ) is one of our least favorite stocks held by AHSAX and earns a Dangerous rating. Over the past five years, Eli Lilly’s NOPAT has declined by 12% compounded annually. The company’s ROIC has fallen from 21% in 2010 to only 8% in 2015. NOPAT margins have followed a similar path and fallen from 24% in 2010 to 14% in 2015. In the meantime, LLY has increased 25% over the past two years, which has left shares overvalued. To justify its current price of $75/share, Eli Lilly must grow NOPAT by 8% compounded annually for the next 14 years . This expectation seems awfully optimistic given the deterioration of LLY’s business operations. 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 Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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