May 2014 Valuation Heatmaps: The Ongoing Saga of Overvalued Biotechs

Each month, we run all the stocks in North America through a quantitative valuation screen to determine which sectors and industries are the most overvalued and undervalued. The result is a series of valuation heatmaps. The size of each box represents the market capitalization of the sector or industry, and the color represents the degree of value within the group of companies - red are the most overvalued and green the most undervalued.

The key investment takeaways this month are:

·         The sector-level picture in May looks very similar to April's—Utilities are screening as the most undervalued sector and Healthcare as the most overvalued one.

·         Six out of 10 of the largest market capitalization stocks screening as most undervalued are in the Energy sector. However, there is one industry in the Energy sector screening as overvalued, offering the potential for a sector-neutral long-short strategy.

·         The Ongoing Saga of Overvalued Biotech continues. Healthcare remains frothy.

Sector Overview

In our sector-level relative valuation heatmap Healthcare overvaluation sticks out like a sore thumb:

Undervalued Sector: Energy


Utilities have the largest proportion of stocks screening as relatively undervalued, followed by Real Estate and Financial Services. However, in terms of the absolute number of bullish potential investments and the market capitalization of the stocks screening as attractive, the Energy sector stands out.

Within the Energy sector, the Integrated Oil & Gas industry is notable for its relative undervaluation:


In contrast, the Oil and Gas Exploration and Production (E&P) industry is notable for its relative overvaluation. This leads to the potential for a sector-neutral long-short investment strategy. Two mid-cap E&Ps that are presently screening as overvalued are Kosmos Energy KOS ($4.2 billion) and PDC Energy PDCE ($2.3 billion).

Overvalued Sector: Healthcare

Within Healthcare, Biotech continues to stand out among a generally overvalued sector:

The Dow Jones U.S. Biotechnology Index ^DJUSBT peaked on February 24 at 1,584.77 and recorded a drawdown of 19% by April 11. However, just when we thought biotechs would slip into official bear market territory, prices recovered a bit. The index closed out April at the 1,395.07 level—1% below its March close and 12% below its February peak. The industry still screens as frothy, though not as overvalued as last month due to a combination of price falls and / or growth in trailing twelve-month earnings.

Whereas 79 biotech stocks screened as overvalued at the end of March, six fewer are screening as such at the end of April.


© 2014, YCharts, Inc.

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