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Vanguard Health Care Fund Sells Out of Allergan

The Vanguard Health Care Fund (Trades, Portfolio) recently posted its third-quarter portfolio update. During the quarter, the mutual fund's most significant sale was Allergan PLC (NYSE:AGN). The fund's new positions include Genmab A/S (NASDAQ:GMAB) and Encompass Health Corp (NYSE:EHC).


Founded 25 years ago, the Vanguard Health Care Fund offers investors exposure to the domestic and international health care industries. It aims to reduce the cost of investing through keeping turnover low and through geographic diversification. Due to its narrow focus on stocks related to health care, the fund's website advises keeping a long-term perspective and only investing as an addition to an existing portfolio.

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As of the quarter's end, the fund's equity portfolio is valued at $41.55 billion. In total, it owns shares in 91 stocks, four of them being new positions. This quarter, the mutual fund made more sales than additions to its equity portfolio, with the portfolio value decreasing approximately 4.64% from the $43.57 billion it had at the end of the previous quarter. Its current top holdings are AstraZeneca PLC (LSE:AZN) with 6.36% of the portfolio, Bristol-Myers Squibb Co. (NYSE:BMY) with 6.13% and UnitedHealth Group Inc. (NYSE:UNH) with 5.12%.

Allergan

The fund's largest single transaction during the third quarter was its sale of all 15,347,204 of its shares of Allergan, a stock which it was buying until the previous quarter and which was its second-largest holding before the sale. Shares of the company were trading at an average price of $162.97 during the quarter.

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Allergan is a pharmaceutical company headquartered in Dublin, Ireland. Its major products lines are in central nervous system treatment, eye care and medical aesthetics (products such as Botox and Coolsculpting). The company has a market cap of $58.66 billion and an enterprise value of $79.95 billion.

Allergan's profits skyrocketed from 2016 to 2017 due mainly to the popularity of its Botox products, but despite fairly constant revenue in 2018-19, net income slid due to reasons such as multibillion-dollar goodwill writedowns and wide gaps between GAAP and non-GAAP earnings. For example, in 2018, Allergan posted GAAP net losses per share of $15.26 alongside non-GAAP earnings per share of $16.69.

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This disparity between revenue and profit has caused a steady decline in stock price from its high of $332.10 in mid-2015. In the past, shareholders were holding on for the day the company would stabilize itself and return to earning a solid net income, which would cause the stock price to shoot up. However, discussions of Allergan merging with AbbVie (NYSE:ABBV) have nearly reached the approval stage, and the merger is expected to be completed in early 2020. This leaves little room for the company to grow its stock price on its own.

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Genmab

The Health Care Fund bought 3,150,246 shares of Genmab, impacting the equity portfolio by 0.15%. During the quarter, the stock traded at an average price of $19.44 per share.

Genmab is a biotechnology company that specializes in antibody therapeutics for cancer treatment. Due to the success of its two approved antibodies, daratumumab for certain multiple myeloma indications and ofatumumab for certain chronic lymphocytic leukemia indications, Genmab has been posting positive net income increases since 2014. The company has a broad clinical and pre-clinical pipeline for the development of new antibodies. It currently has a market cap of $10.85 billion and an enterprise value of $9.85 billion.

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Genmab has a GuruFocus financial strength score of 9 out of 10 and a profitability score of 8 out of 10. It has an operating margin of 32.27% and a cash-debt ratio of 35.82, which beats 64.06% of industry competitors. The price-earnings ratio is currently at 75.47 with a forward price-earnings ratio of 50.25, though these measures are often unreliable in the fast-changing biotechnology sector.

Encompass Health

The fund bought 568,400 shares of Encompass Health. The stock traded at an average price of $63.12 per share during the quarter. In the past, the fund has bought this stock twice, but sold out of it within a few quarters.

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Encompass Health is a home health, inpatient rehabilitation and hospice care provider operating in the United States. As the national leader in integrated health care services, the company aims to provide cost-effective and high-quality care to patients. It has a current market cap of $6.83 billion and an enterprise value of $10.46 billion.

Encompass has recently completed its acquisition of Alabama-based hospice operator Alacare, adding 23 home health locations and 23 hospice locations to its name and causing an uptick in the stock price. This brings the number of states that the company operates in up to 37, meaning it still has potential to grow in the rest of the U.S.

The company has a GuruFocus financial strength rating of 4 out of 10 and a profitability score of 9 out of 10. It has a price-earnings ratio of 21.51, a price-book ratio of 5.14, an operating margin of 14.18% and an interest coverage of 4.22. According to the Peter Lynch chart, the stock may be a little overvalued.

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Disclosure: Author owns no shares in any of the stocks mentioned.

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This article first appeared on GuruFocus.