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What Is The PE Of The iShares Biotech ETF? It Depends On Whether You Read The Fine Print

Tyler Durden's picture




 

Something amusing, or rather, shocking was revealed when we decided to check on a fact Jim Grant noted yesterday in the fine print of the iShares Biotech ETF, also known as the IBB.

As a reminder, this is an ETF whose price over the past two years had gone absolutely parabolic and which almost doubled in the past year until the recent tremors managed to put a slight dent in the second tech/story bubble.

 

So say one is suddenly concerned about the valuation of the ETF and decided to check what the P/E multiple of the underlying biotech basket. One can simply pull the iShares IBB fact sheet where one would find the following...

 

Ok so, 41x P/E: not exactly cheap but hardly the ridiculous bubble valuations one is used to from the first dotcom bubble, right? Wrong. Because if one reads just a little further down the page one finds the following shocking disclaimer:

Here is what the highlighted section says:

Negative earnings are excluded, extraordinary items are excluded, and P/E ratios over 60 are set to 60.

What? So basically the "reported" PE is one which just happens to exclude all companies with negative earnings, and also rounds down any biotech company with a PE higher than 60x to... 60x.

Here alarm bells should be going off, because clearly the whole purpose of this latest "fudge" is to make the ETF appear more palatable then it is, when in reality the actual PE of the companies is something vastly different.

Haw vastly? We decided to break down the components of the IBB using Bloomberg financial data, and found the following stunners:

  • Of the 122 companies that make up the basket, only 25 have an LTM P/E multiple that is under 60X (and above 0.0x)
  • What is worse, of the entire IBB company universe, a whopping 86 companies have negative net income, which according to the definition are simply excluded from the calculation!

In other words, 80% of the companies that make up the IBB are either "adjusted" or outright excluded from P/E calculation purposes.

So what happens when one adds across the market caps of the constituent companies and divides by their consolidated earnings, and yes including those companies that have negative earnings.

The result is shown below.

Or reported PE 40.9x, real PE: 82.5x. Just a slight difference.

Bottom line: the reported P/E of the IBB index is more than 50% lower what it really is!

Of course, in this current market bubble, we doubt anyone would care much if at all about fundamentals, as the only games in town are i) excess liquidity, ii) momentum and iii) finding a greater fool to sell to before the bubble really bursts and things like P/E multiples and generally fundamentals are again relevant.

 

It appears this fact was NOT well known...

 

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Thu, 05/08/2014 - 12:44 | 4740160 crusty curmudgeon
crusty curmudgeon's picture

Articles like this will get the internet shut down.

Thu, 05/08/2014 - 13:03 | 4740231 svayambhu108
svayambhu108's picture

There's an Ukrainian saying: stay close to the kitchen and far from the boss.

Thu, 05/08/2014 - 13:11 | 4740261 SafelyGraze
SafelyGraze's picture

the point of this article is to recommend buying IBB

one of the benefits of reading zh: actionable informations!

Thu, 05/08/2014 - 13:14 | 4740271 James_Cole
James_Cole's picture

It appears this fact was NOT well known...

Tyler, market mover?

Thu, 05/08/2014 - 13:52 | 4740410 jbvtme
jbvtme's picture

lies, deceit, fraud...i'm beginning to lose confidence

Thu, 05/08/2014 - 14:29 | 4740552 SeattleBruce
SeattleBruce's picture

"Or reported PE 40.9x, real PE: 82.5x. Just a slight difference."

Can't blame them.  They're just taking their lead from the wonderful government (BLS, et al) and FED economists who do this kind of thing all the time...what's the big deal?  It's simply keeping up with the (economist) Jones's.  /s

Thu, 05/08/2014 - 16:33 | 4741047 Bosch
Bosch's picture

NOW you're starting to lose confidence? 

Thu, 05/08/2014 - 13:17 | 4740279 john39
john39's picture

i'm certain that in the current environment of forceful government regulation of wall street, that this one stock is an outlier, and you won't find this gimmick in any other stocks...  (laughing hysterically as i type)....

Thu, 05/08/2014 - 13:39 | 4740365 SilverDOG
SilverDOG's picture

crusty curmudgeon,

 

 

"We the People" need to create an alternative.

"Shut. it. Down. !"

 

Thu, 05/08/2014 - 14:25 | 4740539 The Axe
The Axe's picture

SIMPLY the best of info Jim Grant and Tyler can offer..amazing just amazing

Thu, 05/08/2014 - 14:25 | 4740544 Bunga Bunga
Bunga Bunga's picture

Maybe WSJ needs to put this behind the paywall:

Russell 2000 100.50

http://online.wsj.com/mdc/public/page/2_3021-peyield.html

 

Thu, 05/08/2014 - 12:45 | 4740165 Serfs Up
Serfs Up's picture

Caveat idolator

Thu, 05/08/2014 - 12:47 | 4740168 ParkAveFlasher
ParkAveFlasher's picture

We are a country full of mocking ash-holes, until we aren't.

Thu, 05/08/2014 - 12:48 | 4740172 whisperin
whisperin's picture

WoWser! What about the rest of the ishare ETF's methodology... like maybe the SP500 or the Russel?

Thu, 05/08/2014 - 12:50 | 4740177 Tyler Durden
Thu, 05/08/2014 - 12:54 | 4740197 whisperin
whisperin's picture

Thanks Tyler...I think! I wonder if if anyone in a corner office with their panoramic view is muttering ... OH SHIT!!

Thu, 05/08/2014 - 13:03 | 4740232 DavidC
DavidC's picture

Anyone with any intelligence has been saying that for the last 5 years, since QE ("We are not monetizing the debt", "We are not printing money") started.

DavidC

Thu, 05/08/2014 - 13:24 | 4740314 Say What Again
Say What Again's picture

I wonder if there are any gems of this nature deep in the anals of some report about BLK

Thu, 05/08/2014 - 12:57 | 4740205 Oracle of Kypseli
Oracle of Kypseli's picture

Why is anyone consider staying in this markets is beyond me. Gamblers?

Thu, 05/08/2014 - 13:05 | 4740242 Fox-Scully
Fox-Scully's picture

Simple--It is the blind squirrel/acorn syndrom.

Thu, 05/08/2014 - 13:35 | 4740350 SilverDOG
SilverDOG's picture

Got Nuts ?

Thu, 05/08/2014 - 14:01 | 4740448 lrdrvrZH
lrdrvrZH's picture

I don't try to invest against the Fed. No matter how idiotic their policies are. A lot of good people invested with common sense but against Fed policies and they're poor now.

Being in this rigged market that ultimately will suffer from the Fed's policies is not an endorsement. I'm in it purely for the money. But my trailing stops are tight! ;)

 

Thu, 05/08/2014 - 14:14 | 4740500 Kayman
Kayman's picture

Printing the next $ 4 trillion might be interesting.

Thu, 05/08/2014 - 15:51 | 4740930 Its_the_economy...
Its_the_economy_stupid's picture

I don't try to invest against the Fed

 

Diamond Jim Brady was asked if he knew the Bunko game he playing in was rigged. He answered, "of course." When asked why he was playing in it anyway he replied, "Because its the only game in town."

Thu, 05/08/2014 - 18:32 | 4741418 Bunga Bunga
Bunga Bunga's picture

When all are betting on $4 trln it won't be enough. Try $40 trln.

Thu, 05/08/2014 - 13:59 | 4740430 Mercury
Mercury's picture

I'm sure they'll claim it's necessarily a harmonic mean since some stocks have no or negative earnings. Gotta adjust somehow I suppose.

Nonetheless the result is garbage-in-garbage out at best.

Thu, 05/08/2014 - 15:53 | 4740933 fourZero
fourZero's picture

Would really like to see the actual PE for S&P 500 ETF!

Thu, 05/08/2014 - 12:52 | 4740186 ragemachinest
ragemachinest's picture

dafuq

Thu, 05/08/2014 - 13:18 | 4740284 Relentless101
Relentless101's picture

How is this not insanely illegal? I actually bursted into laughter when I read the disclaimer.

Thu, 05/08/2014 - 14:17 | 4740509 Kayman
Kayman's picture

That which is illegal in made legal for the financial criminals.  Anything you do is illegal.

Thu, 05/08/2014 - 12:54 | 4740194 Mark123
Mark123's picture

So, in other words, the crappy companies are excluded.  Brilliant.

I assume this also applies to other ETFS?

Thu, 05/08/2014 - 12:54 | 4740195 risk-reward
risk-reward's picture

Good catch.

Thu, 05/08/2014 - 12:54 | 4740196 Spungo
Spungo's picture

lol 10x price to book

Everbody, everybody, just get into it, get stupid,
Get retarded, get retarded, get retarded,
Let's get retarded, let's get retarded in here

Thu, 05/08/2014 - 12:59 | 4740200 Cthonic
Cthonic's picture

Negative P/B and P/B over 25 are excluded as well...

But hey, a three year standard deviation of 19%  ~  back up the truck, we're headed to the moon, via the earth's core.

Thu, 05/08/2014 - 12:58 | 4740210 jubber
jubber's picture

Wow Russell just turned red!

Thu, 05/08/2014 - 12:59 | 4740215 Yancey Ward
Yancey Ward's picture

Well, negative earnings aren't really earnings at all, so it makes perfect sense to not include them in a P/E calculation.  And if a P/E is over 60, well that is so close to being negative, we may as well call it 60, or even better, don't even include it!  See, I improved the calculation for the ETF!  Where is my bonus?

Thu, 05/08/2014 - 13:01 | 4740226 blindman
blindman's picture

it is not like anyone is using real money,
are they?

Thu, 05/08/2014 - 16:11 | 4740255 booboo
booboo's picture

"It is not like anyone is using real money,
are they?"

No, fiat, bitemecoin, fairypubics, unicorn farts, and eye of newt

Thu, 05/08/2014 - 13:02 | 4740227 buzzsaw99
buzzsaw99's picture

to the BISmobile? doesn't have the same ring to it.

Thu, 05/08/2014 - 13:02 | 4740230 Yen Cross
Yen Cross's picture

  The department of BLS taught them well... I don't see how that tiny disclaimer indemnifies them if that fund goes tits up.

Thu, 05/08/2014 - 13:09 | 4740254 lasvegaspersona
lasvegaspersona's picture

YC

you only need indemnification if you are causing trouble. If you are 'helping' the story of the glorious recovery of the fatherland you'll be protected.

Thu, 05/08/2014 - 13:16 | 4740273 Yen Cross
Yen Cross's picture

  I wonder what the $ value that 80% of excluded companies represents? ( of total fund value)

Thu, 05/08/2014 - 13:06 | 4740239 bankonzhongguo
bankonzhongguo's picture

A friend recently asked me where the (next) "bubble" is going to be.

I said it already here, but it's not real estate.  It's not Internet 2.0 or even biotech.  It's not prison REITs or shotguns and canned food or African bug farms.

We are living in a Fraud Bubble.

The hot money invests in Crime; from the Political Parties, to a corrupt Congress and staff to the Executive, to the Deep State, to the manifestly corrupt Fed and its shareholders, to the revolving door "regulators" to the insiders/directors to the executives on the edge of being downsized by robots and computers to the underemployed millions scrambling to survive to the debt-bondaged 20-somethings that are facing a for-profit debt-prison complex to millions living in quiet and forgotten desperation on Food Stamps and the killing-lie that is Obamacare.

From the Fed on down to the cost of bacon and coffee in your local grocer, EVERYTHING is a rigged fix.  It does not matter what the industry or segment is, you are either an insider with an army of lobbyists and insider market making info or you are a Pig Muppet.

It's the Fraud Bubble.

 

Thu, 05/08/2014 - 13:16 | 4740263 Tenshin Headache
Tenshin Headache's picture

Fraud and corruption are endemic toward the end of historic credit bubbles.

Thu, 05/08/2014 - 13:22 | 4740305 centerline
centerline's picture

Is there an ETF for that?

Thu, 05/08/2014 - 13:46 | 4740384 cro_maat
cro_maat's picture

GLD & SLV

Thu, 05/08/2014 - 14:20 | 4740362 Chief Wonder Bread
Chief Wonder Bread's picture

But what will they call it? You can't call it the Fraud Bubble because that's too generic.

How about the Greedspankme Bubble (it sure as hell has been spanking me with yield suppression).

Thu, 05/08/2014 - 14:56 | 4740696 Chief Wonder Bread
Chief Wonder Bread's picture

Yellen says 'I don't know what to call our system,' in testimony before CONgress:

http://cnsnews.com/news/article/susan-jones/fed-chair-unsure-if-capitali...

You can call it the GREEDSPANKME system, Mr Chairwomanman.

Thu, 05/08/2014 - 14:26 | 4740545 Kayman
Kayman's picture

Big Mac meal in 1968- change back from $1.00 

Big Mac meal today $7-9 bucks depending on where you live.

Inflating is 700 to 900 %.  And please don't tell me ground up lips and arseholes taste better
today than in 1968.

Thu, 05/08/2014 - 13:05 | 4740240 What is The Hedge
What is The Hedge's picture

Can you short an ETF?

Thu, 05/08/2014 - 13:13 | 4740270 Tenshin Headache
Tenshin Headache's picture

BIS = ultrashort Nasdaq biotech index

Thu, 05/08/2014 - 13:06 | 4740247 lasvegaspersona
lasvegaspersona's picture

My accountant says I can do my taxes like that. Think it'll be OK with the IRS?

Thu, 05/08/2014 - 13:13 | 4740267 Wizard of Ozman
Wizard of Ozman's picture

82.5=<100=Bullish=go long

Thu, 05/08/2014 - 13:18 | 4740285 ebworthen
ebworthen's picture

Earnings, like deficits, don't matter.

And cotton candy is a wholesome nutritious food.

Thu, 05/08/2014 - 13:20 | 4740294 GrinandBearit
GrinandBearit's picture

Looking at Maria-Caruso Cabrera on CNBC right now.

What the hell happened to her?... she looks like shit... she's pasty, she's got flabby looking arms and her tits shrunk.  She must have had her implants removed.

Thu, 05/08/2014 - 13:28 | 4740325 ebworthen
ebworthen's picture

Too much travel overseas; long flights full of germs and reduced oxygen levels to save fuel, and airport food.

That, or she is just one of those Women who look good in their 20's but turn into hags not long after 30.

Thu, 05/08/2014 - 13:20 | 4740296 Notsobadwlad
Notsobadwlad's picture

In this goal-seek managed world, all the banks have to do is pick a price and lend their pet cronies the money to buy. Either you are inside the game or not. The trick to win is to find a way not to play.

Thu, 05/08/2014 - 13:29 | 4740326 ghostzapper
ghostzapper's picture

What's the PE for the S&P if you removed the bullshit games and put the financials back on the accounting standards that existed prior to 2009?  100, 200, 1000?  Would "earnings" even be positive? 

Thu, 05/08/2014 - 13:33 | 4740339 Tyler Durden
Thu, 05/08/2014 - 13:36 | 4740357 ghostzapper
ghostzapper's picture

Any analysis that exists showing what the financials would have reported had Timmah not changed the rules for them?  I realize that would require quite a bit of work just curious if it is out there.

Thu, 05/08/2014 - 13:58 | 4740436 ebworthen
ebworthen's picture

S&P 666 true valuation.

p.s. - Mandy Drury showing some nice cleavage today.

Thu, 05/08/2014 - 13:29 | 4740331 gdpetti
gdpetti's picture

Well, they are consistent with most govt economic numbers.... the 2 to 2.5 mutiple. Someone surely didn't read this factsheet before releasing it, as it's so blatantly obvious in its disregard for sanity, so it must be the CEO's approved it personnally, as they aren't responsible for their actions anyway. Perfect, no?

Thu, 05/08/2014 - 13:32 | 4740335 gdpetti
gdpetti's picture

On second thought, though it is just a bit of silliness that young Master Peter would enjoy, Who here believes in fairies? Clap your hands and say after me, "I believe, I believe, I believe"... just BTFD, right?

Thu, 05/08/2014 - 13:33 | 4740343 blindman
blindman's picture

well played, now watch it go back up when
the market digests the implications of....
https://www.vioxxsettlement.com/
.
background story ...
http://www.nj.com/business/index.ssf/2013/07/merck_settles_vioxx_claim_t...
.
When half a million Americans died and nobody noticed
Was the US drug Vioxx responsible for far more deaths than has been acknowledged so far?
COLUMN LAST UPDATED AT 10:03 ON FRI 27 APR 2012
http://www.theweek.co.uk/us/46535/when-half-million-americans-died-and-n...

Thu, 05/08/2014 - 13:51 | 4740407 blindman
blindman's picture

"..."Besides," says Unz laughing, "it shows the stupidity of our political leaders that they didn't seize upon this great opportunity. They should have just renamed Vioxx the 'Save Social Security Drug,' and distributed it free in very large doses to everyone, starting on their 65th birthday. Maybe they should have even made it mandatory, three times per day. At sufficiently large levels of national consumption, Vioxx could have almost singlehandedly eliminated all our serious budget deficit problems. 'Vioxx - The Miracle Anti-Deficit Drug'." · " ....

Thu, 05/08/2014 - 13:33 | 4740344 The Most Intere...
The Most Interesting Frog in the World's picture

And add on top of this the accounting schemes that are guaranteed to be going on (as they do in every ponzi scheme at the top of the bubble) to artificially inflate revenues, decrease expenses and otherwise cover up the fact that TS is about to HTF...

Thu, 05/08/2014 - 13:43 | 4740379 NDXTrader
NDXTrader's picture

I don't think we are at peak accounting fraud, yet. With the experience of TSLA, TWTR and FB I'm not sure why any company says anything about GAAP anymore. Evidently no one cares

Thu, 05/08/2014 - 13:38 | 4740351 mayhem_korner
mayhem_korner's picture

 

 

The Cubs are going to go 55-0 this year...because they won't count the "negative victories".

Thu, 05/08/2014 - 13:42 | 4740374 Ungaro
Ungaro's picture

No worries. Chairwoman Yellen sees no bubble, hears no bubble and says no bubble. Nu, who are you to argue???

Thu, 05/08/2014 - 13:42 | 4740377 Spungo
Spungo's picture

Excluding the negative PE ratios just means the ETF manager is lazy. What he's doing is putting the PE ratios in Excel then trying to do a weighted average. What do you put for the ones with no PE ratio? If you put 0, that would really screw up the end result. Putting 999999 would screw it up even more. Simple solution: those stocks don't count.

The not-lazy way to calculate PE would be a weighted sum of stock prices and a weight sum of earnings then divide the two.

Thu, 05/08/2014 - 14:20 | 4740523 buzzsaw99
buzzsaw99's picture

lazy has nothing to do with it on the etf manager's part. the latter is just as easy as the former to calculate. it is pure fraud meant to entice lazy investors who only read the big print.

Thu, 05/08/2014 - 13:48 | 4740392 Dr. Engali
Dr. Engali's picture

Fundermentals......Pfffttt... If Amazon can have a 3500 multiple so can IBB.  Buy! Buy! Buy!

Thu, 05/08/2014 - 13:51 | 4740403 Spungo
Spungo's picture

My favorite argument is when people say it's a good company. Amazon is profitable, so it's ok to pay 9000x earnings! There's no possible way the price would drop to something closer to 10, 20, or even 50x earnings.

Thu, 05/08/2014 - 14:04 | 4740455 khakuda
khakuda's picture

The same arguments that were made in the late 90s and afterwards laughed at when things imploded.

It is always easy to read the books after the fact on human emotion/stupidity and ask what were they thinking, yet one can always find current examples of the very same behaviour in the present.  At least we are just talking about central bank created financial bubbles here and the loss will be monetary.  'What were they thinking printing all that money and leaving rates at zero for a decade...of course it would lead to huge bubbles and the accompanying human and financial capital misallocation'.

The real crimes are things are when crazy stuff happens like Nazi crimes that people participate in.  Always obvious after the fact how wrong it was but few question it in the present.

Thu, 05/08/2014 - 14:25 | 4740543 blindman
blindman's picture

OpEdNews Op Eds 5/7/2014 at 11:23:51
Odessa-- the First Pogrom--.....
http://www.opednews.com/articles/Odessa--the-First-Pogrom-by-George-Elia...

Thu, 05/08/2014 - 13:57 | 4740434 Bearish News
Bearish News's picture

Russell 2000 does the same thing:

http://www.russell.com/indexes/americas/indexes/fact-sheet.page?ic=US2000

Real P/E, as reported by the WSJ, is 100.5. Lol.

Thu, 05/08/2014 - 14:00 | 4740442 steveo77
steveo77's picture

URS is an evil company.    They are partners at WIPP, which has been grossly mismanaged.

They are also partners at Sellafield (the UK version of Hanford) in which they have been reported as grossly mismanaged, and yet their tentacles have "earned" them a 5 year extension on their contract.   The total cost is going to be around $130B US.

http://nuclearmanagementpartners.com/

So you been wondering....just who are the evil powers that be?     Know you know.

http://nwp-wipp.com/partners.html

Thu, 05/08/2014 - 14:11 | 4740469 CHX
CHX's picture

Just let the paper hustlers continue their ponzi. The ice is getting thinner, and it'll be memorable when it all topples over. All of the fiat hologram world in which the western financial world and its sheeply debt slaves find themself in. Western society has a rude awakening coming along their way. Sleep well, while you can. Good night, and good luck to all.

Thu, 05/08/2014 - 14:39 | 4740597 syntaxterror
syntaxterror's picture

If you're not lying you're not trying. And Blowjob Barry will still invite you to round of 18 if you're caught lying.

Thu, 05/08/2014 - 14:41 | 4740612 MrSteve
MrSteve's picture

James Grant is a great financial reporter and an original thinker.

Thu, 05/08/2014 - 17:22 | 4741184 Sticky Wicket
Sticky Wicket's picture

Any income I make over $100 I'm just not going to count. The fedgov would be OK with that, right?

Thu, 05/08/2014 - 17:54 | 4741285 Spungo
Spungo's picture

"The same arguments that were made in the late 90s and afterwards laughed at when things imploded."

Try reading Seth Klarman's book published in 1991. You would swear it was written in 2002 or 2010. It talks about stupidly expensive stocks that were related to a previous tech bubble. They were related to things like hard drives and tape drives. This was when computers were starting to be a household item. He also mentions a junk bond bubble caused by falling interesting rates.

It's truly amazing how NOTHING changes. It's really a beautiful thing. There's a lot of money to be made by front running these retard bubbles. A lot of people got rich during the dot com bubble. For every person buying at $200 per share for some junk internet company, that means someone was selling at $200 per share.

Thu, 05/08/2014 - 19:33 | 4741605 MollyHacker
MollyHacker's picture

It's all nuts and if your buying the negative interest (war) Bonds, then stocks at P/E x100 will still be attractive.

Thu, 05/08/2014 - 19:53 | 4741667 Spungo
Spungo's picture

Buying bonds still makes a lot of sense. Let's say the bond rates are 3% and inflation is 5%. If you hold cash, you lose 5%. If you hold bonds, you lose 2%. If you buy whatever random garbage stock your "financial planner" told you to buy, you'll probably lose 70%.

Look at sites like ETF Daily News to see how retarded some of the advice out there is. Tesla is down quite a bit from its peak, and one article said this is a buying opportunity. Yes this is an opportunity to buy a company with NO EARNINGS. I'm sure that will end well. What I find interesting is that it's not illegal to suggest people buy shares of Tesla or Twitter. I say that because stocks with no earnings are pretty much the definition of a ponzi scheme. If you're an investor, you buy things that have cash flow, either current cash flow or future cash flow. Real estate has cash flow from rent. Companies like Microsoft pay profits out in the form of dividends. A mining company might not have cash flow right now, but it will have cash flow when the prices of metals rise. Companies like Twitter have no cash flow nor do they have any prospect of future cash flow. The value of Twitter only goes up if more suckers are pulled into the scam. That's called a ponzi scheme.

I'm not saying it should be illegal to suggest people buy Twitter. I think people have the right to set their money on fire if that's what they choose to do. I'm just saying that it seems logically inconsistent. 

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