A Bullish Call On A Favorite Healthcare ETF

Thank goodness for the financial service sector. That is the only S&P 500 sector that has performed worse than healthcare this year. Fortunately for healthcare exchange traded funds, such as the Health Care SPDR (ETF) (NYSE:XLV), rival financial services funds have been notably worse.

The Financial Select Sector SPDR Fund (NYSE:XLF) is down 7 percent year-to-date, a loss that is slightly more than double that of XLV's. However, there are major differences between the downbeat tones applying to these sectors and the corresponding ETFs. Namely, first-quarter earnings from the financial services sector are expected to be slack at best and the group is, to a large extent, still held hostage by the Federal Reserve's interest rate policy.

Conversely, there is a growing number of investors that view the healthcare sector's struggles to start 2016 as a buying opportunity for the previously high-flying group. Of course, any endorsement of a broader healthcare ETF like XLV is an indirect bullish call on the biotechnology group that has weighed on the healthcare sector.

Diversified healthcare ETFs, such as XLV, benefited from surging biotechnology stocks, but have recently succumbed to that industry's doldrums. To be precise, XLV's biotech weight is 22.2 percent and that has been problematic this year, as each of the three largest biotech ETFs are sporting year-to-date losses of more than 20 percent, meaning those ETFs are mired in bear markets.

The Bulls

One of the more bullish views on XLV, the largest healthcare ETF by assets, comes by way of AltaVista Research. AltaVista has an overweight rating on XLV, a rating the research firm assigns to just one of the other 10 sector SPDR ETFs.

Funds in this category consist of stocks trading at attractive valuations and/or having above-average fundamentals, said AltaVista in a recent note.

With earnings season here, investors are reminded that they should be looking for those sectors and industries that are candidates to deliver solid profit and revenue growth this year. XLV's holdings are expected to deliver sales growth of eight percent this year and per share earnings growth of 8.2 percent, according to AltaVista data.

A Word Of Caution

Still, investors are expressing caution on XLV. The ETF's shares outstanding tally is lower by 8 percent over the past month, while short interest in the fund resides at 29 percent, according to AltaVista data. That is the second-highest short interest on a percentage basis among the 11 sector SPDRs.

Until the recent 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.Yet the exceptionally high and steady profitability on which that revaluation was based remains intact. Post-decline, the sector is trading at a P/E discount to the broader S&P 500, where as historically it has enjoyed a premium, earning the sector an Overweight recommendation, said AltaVista.

Disclosure: Todd Shriber owns shares of XLF.

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