Market Overview

PPH May Be Home To Hedge Fund Hotels, But This ETF Can Endure

PPH May Be Home To Hedge Fund Hotels, But This ETF Can Endure

The healthcare sector, the third-largest sector weight in the S&P 500, is the worst-performing group in the benchmark U.S. index this year. And that was before news of the collapse Pfizer Inc. (NYSE: PFE)'s deal to acquire Allergan plc Ordinary Shares (NYSE: AGN).

Pfizer-Allergan Fall-Through Has Tangible Effects

Dow component Pfizer was willing to shell out $160 billion to acquire Allergan, the maker of Botox, for, among other reasons, tax benefits that come with Allergan's Ireland domicile. Not that the U.S. government is a particularly good steward of anyone's money per se, but Uncle Sam is definitely not fond of deals such as Pfizer/Allergan, also known as inversions. The specter of the government changing the rules as it sees fit is seen as a primary reason Pfizer and Allergan mutually agreed to part ways.

Related Link: Is Allergan Worth Over $300 Without Pfizer?

In the near term, this is not the type of news an exchange-traded fund such as the Market Vectors Pharmaceutical ETF (NYSE: PPH) needs to contend with. PPH is down 11.3 percent year-to-date and closed Tuesday more than 22 percent below its 52-week high.

In addition to its 4.2 percent weight to Allergan, PPH features some smaller weight to other “hedge fund hotels,” including the controversial Valeant Pharmaceuticals Intl Inc (NYSE: VRX) and Mallinckrodt PLC (NYSE: MNK), a stock some short sellers see as making Valeant look like “choirboys.”

Allergan, Valeant and Mallinckrodt combine for 7.4 percent of PPH's weight. For now, that is the bad news. The good news is that steadier fare such as Dow components Pfizer and Johnson & Johnson (NYSE: JNJ) top PPH's lineup.

It's Not All Bad For PPH

Although the healthcare sector is struggling, J&J is one of the 19 Dow stocks up on a year-to-date basis. The company is a steady dividend grower with a robust pipeline. Merck & Co., Inc. (NYSE: MRK), another PPH holding, is also one of the Dow stocks in the green this year.

Plus, mergers and acquisitions activity is not dead for PPH holdings just because Pfizer and Allergan are parting ways. It is just speculation at this point, but if Pfizer agrees to drop the inversion bit, it could revisit acquiring AstraZeneca plc (ADR) (NYSE: AZN), which the Viagra maker tried to acquire two years ago. AstraZeneca is 4.5 percent of PPH's weight.

Overall, PPH is home to 26 stocks, several of which remain legitimate takeover targets, while at least 20 percent of the ETF's lineup, if not more, have the resources to make pharmaceuticals deals happen.

Disclosure: Todd Shriber owns shares of JNJ.

Image Credit: Public Domain

Posted-In: Biotech Long Ideas Sector ETFs Short Ideas Health Care Hedge Funds Top Stories Markets Best of Benzinga


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