Get Premium to unlock powerful stock data

The Vanguard Health Care Fund's Top 5 Trades of the 2nd Quarter

Fund pulls back its largest holding

Author's Avatar
Graham Griffin
Aug 05, 2021

Summary

  • Largest holding in UnitedHealth Group pulled back
  • Fund sells out of PPD and Smith & Nephew
  • Additions to Stryker and Zai Lab positions
Article's Main Image

The

Vanguard Health Care Fund (Trades, Portfolio) has revealed its portfolio for the second quarter of this year. Major trades for the fund include a reduction in its portfolio-leading UnitedHealth Group Inc. (UNH, Financial) position, selling out of its PPD Inc. (PPD, Financial) and Smith & Nephew PLC (LSE:SN., Financial) holdings and additions to the fund’s Stryker Corp. (SYK, Financial) and Zai Lab Ltd. (ZLAB, Financial) positions.

The fund seeks long-term capital appreciation by investing in stocks broadly representing the health care industry. The advisor seeks to maintain exposure across five primary subsectors: health services, medical products, specialty pharmaceuticals, major pharmaceuticals and international markets. Fundamental research focuses on companies with high-quality balance sheets, strong management and the potential for new products that will lead to above-average growth in revenue and earnings.

Portfolio overview

At the end of the quarter, the fund’s portfolio contained 102 stocks, with five new holdings. It was valued at $50.80 billion and has seen a turnover rate of 4%. Top holdings at the end of the quarter include UnitedHealth Group, AstraZeneca PLC (

LSE:AZN, Financial), Pfizer Inc. (PFE, Financial), Eli Lilly and Co. (LLY, Financial) and Novartis AG (XSWX:NOVN, Financial).

1423299433679933440.png

The top industries represented within the fund’s health care holdings are general drug manufacturers (31.28%), biotechnology (22.44%) and healthcare plans (12.03%).

1423300246628323328.png

UnitedHealth Group

The fund pulled back its investment in UnitedHealth Group (

UNH, Financial), which is its largest holding, continuing on a trend that has lasted for six years. The sale of 682,817 shares reduced the holding by 8.68% as the average price per share rose to $398.06 during the quarter. Overall, the reduction had a -0.55% impact on the portfolio, and GuruFocus estimates total gain of the holding at a staggering 506.87%.

1423307402043838464.png

UnitedHealth Group is the largest private health insurance provider in the United States, providing medical benefits to 48 million members across its U.S. and international businesses at the end of 2020. As a leader in employer-sponsored, self-directed and government-backed insurance plans, UnitedHealth has obtained massive scale in managed care. Along with its insurance assets, UnitedHealth's continued investments in its Optum franchises have created a healthcare services colossus that spans everything from medical and pharmaceutical benefits to providing outpatient care and analytics to both affiliated and third-party customers.

On Aug. 5, the stock was trading at $410.49 per share with a market cap of $375.11 billion. According to the GF Value Line, the shares are trading at a modestly overvalued rating.

1423353333929857024.png

GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 1 out of 10. There is currently one severe warning sign issued for assets growing faster than revenue. A medium warning sign has been issued for increasing long-term debt and the company’s cash-to-debt ratio of 0.47 ranks it worse than 69.57% of the industry.

1423309467272990720.png

Other top gurus invested in UnitedHealth Group (

UNH, Financial) include Dodge & Cox, Steve Mandel (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Ruane Cunniff (Trades, Portfolio).

PPD

Vanguard’s PPD (

PPD, Financial) holding was sold out during the quarter after only a year in the portfolio. The 5.42 million shares that were sold traded at an average price of $44.97. GuruFocus estimates the fund gained 62.05% on the holding and the sale had an overall impact of -0.44% on the portfolio.

1423313604920332288.png

PPD is a global contract research organization that provides clinical trial and laboratory services to pharmaceutical, device and diagnostic firms. The clinical development services segment offers outsourced trial services and the laboratory services segment includes both advanced lab testing and central lab services. The company was taken private in 2011 and went public again in 2020. Thermo Fisher Scientific announced it will acquire PPD for $17.4 billion, which is scheduled to close by the end of 2021.

As of Aug. 5, the stock was trading at $46.11 per share with a market cap of $16.20 billion. The stock spiked to approximately $46 per share on the news of the planned acquisition by Thermo Fisher and has stayed relatively steady since then.

1423316252897693696.png

GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rank of 4 out of 10. There are currently two severe warning signs issued for a Beneish M-Score indicating possible manipulation of financials and poor financial strength. The company’s cash flows fell off in 2020 as it tripled its net income.

1423317774645710848.png

PPD (

PPD, Financial) is also owned by Larry Robbins (Trades, Portfolio), Signature Select Canadian Fund (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).

Smith & Nephew

The fund’s long-standing Smith & Nephew (

LSE:SN., Financial) holding was also sold out. The holding was pulled back in the first quarter and the remaining 10.34 million shares were sold at an average price of 15.02 pounds ($20.92) throughout the second quarter. The portfolio saw a -0.42% impact from the sale and GuruFocus estimates the fund gained 26.82% throughout the lifetime of the holding.

1423320449252708352.png

Smith & Nephew designs, manufactures and markets orthopedic devices, sports medicine and ENT technologies and wound-care solutions. Slightly more than 40% of the U.K.-based firm's revenue comes from orthopedic products, and another 30% is sports medicine and ENT. The remaining 27% of revenue is from the advanced wound therapy segment. Roughly half of Smith & Nephew's total revenue comes from the United States, just over 30% is from other developed markets and emerging markets account for the remainder.

The stock was trading at £14 per share with a market cap of £12.30 billion on Aug. 5. The shares are fairly valued according to the GF Value Line.

1423356541565784064.png

GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 6 out of 10. There are two severe warning signs issued for a declining operating margin and declining revenue per share. Despite the warning sign, the company’s operating margin of 14.46% ranks it better than 71.51% of competitors alongside an equally strong net margin.

1423323969674661888.png

Stryker

The largest addition during the quarter was in the fund’s Stryker (

SYK, Financial) holding. The purchase of an additional 787,395 shares grew the holding by 22.28%. The shares traded at an average price of $255.35 during the quarter. GuruFocus estimates the total gain of the holding at 36.62% and the purchase had a 0.40% impact on the portfolio.

1423345934737199104.png

Stryker designs, manufactures and markets an array of medical equipment, instruments, consumable supplies and implantable devices. The product portfolio includes hip and knee replacements, endoscopy systems, operating room equipment, embolic coils and spinal devices. Stryker remains one of the three largest competitors in reconstructive orthopedic implants and holds the leadership position in operating room equipment. Roughly one fourth of Stryker's total revenue currently comes from outside the United States.

On Aug. 5, the stock was trading at $262.35 per share with a market cap of $98.77 billion. According to the GF Value Line, the shares are trading at a modestly overvalued rating.

1423357294820839424.png

GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 3 out of 10. There are currently two severe warning signs issued for assets growing faster than revenue and a declining operating margin. Returns on invested capital have fallen off in recent years, placing a strain on the company’s financial strength.

1423347532670554112.png

Other top guru shareholders of Stryker include

Ken Fisher (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Primecap Management, Ray Dalio (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio).

Zai Lab

Rounding out the fund’s top five trades of the quarter was a boost in portfolio newcomer Zai Lab (

ZLAB, Financial). The holding saw a massive boost of 2,026.01% with the purchase of 1.02 million shares. Throughout the quarter the shares traded at an average price of $160.25, placing the position at a total estimated loss of 6.52% since the first quarter. Overall, the purchase had a 0.35% impact on the portfolio.

1423349088396627968.png

Zai Lab is a biopharmaceutical company focusing on discovering or licensing, developing and commercializing proprietary therapeutics that address areas of unmet medical need including in the fields of oncology, autoimmune and infectious diseases. The pipeline of proprietary drug candidates of the company includes ZL-2306 for treatment across multiple solid tumor types including ovarian and certain types of breast and lung cancers; ZL-2401, which is an antibiotic in a new class of tetracycline derivatives; and ZL-2301, which is an oral, small molecule that targets HCC. The other product candidates include Fugan, ZL-2302 and ZL-1101.

As of Aug. 5, the stock was trading at $149.58 per share with a market cap of $14.25 billion. The GF Value Line warns that the stock is a possible value trap and investors should think twice before purchasing shares.

1423357853665710080.png

GuruFocus gives the company a financial strength rating of 6 out of 10. There are currently three severe warning signs issued for inventory build up, a Sloan Ratio indicating poor quality earnings and a Beneish M-Score indicating the company is a possible manipulator of its financials. The company has recorded increasingly negative net income over the last several years despite increasing revenue since 2018.

1423351191613591552.png

Top guru shareholders of Zai Lab (

ZLAB, Financial) include Baillie Gifford (Trades, Portfolio), Ron Baron (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Jim Simons (Trades, Portfolio).

Also check out:
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com
Rating:
5 / 5 (1 votes)

Please Login to leave a comment