When it comes to growth stocks, investors often expect they will pay up to access that. That's the cost of investing in companies with thrilling rates of earnings growth. In theory, this is even more the case in new, technologically disruptive industries.
Genomics fits the bill as disruptive in the health care arena and many of the investable companies in this space are classified as biotech stocks, a group that typically commands earnings premiums relative to the broader healthcare sector.
Upon closer examination, the newly minted Global X Genomics & Biotechnology ETF (NASDAQ: GNOM) may not be as richly value as investors may think it is. GNOM, which debuted in April, tracks Solactive Genomics Index.
Why It's Important
In a world of unprofitable “unicorns,” it's increasingly important for investors to ascertain why some companies bleed cash. Some have no clear, near-term path to profitability. Others may be investing in their businesses, facilitating growth and not hoarding cash. The latter could be the case with some GNOM components.
“One example of this is in the genomics space, where high R&D costs mean many leading firms in the space often lose money until they develop and receive approval of a successful drug,” said Global X in a recent note. “Just because they are not profitable currently, does not mean their business model is unable to capture positive earnings in the future.”
In a fast-growing, disruptive universe like genomics, it may be more relevant for investors to focus on sales metrics rather than price-to-earnings multiples. Yes, GNOM has a negative price-to-earnings ratio, but that isn't necessarily an indictment of the fund.
“If total sales are low, but growth is very high, it is likely in the earlier stages of adoption than if total sales are large, but growth is flattening,” according to Global X.
Based on price-to-sales and enterprise value/sales, GNOM is expensive relative to the S&P 500. However, data indicate the fund trades at just 0.19 times price-to-sales growth and 0.17 times enterprise value/sales growth.
Those figures are not only low compared to the S&P 500, but low relative to other disruptive themes, including cannabis, robotics and social media.
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