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What Is The PE Of The iShares Biotech ETF? It Depends On Whether You Read The Fine Print
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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Articles like this will get the internet shut down.
There's an Ukrainian saying: stay close to the kitchen and far from the boss.
the point of this article is to recommend buying IBB
one of the benefits of reading zh: actionable informations!
It appears this fact was NOT well known...
Tyler, market mover?
lies, deceit, fraud...i'm beginning to lose confidence
"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
NOW you're starting to lose confidence?
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)....
crusty curmudgeon,
"We the People" need to create an alternative.
"Shut. it. Down. !"
SIMPLY the best of info Jim Grant and Tyler can offer..amazing just amazing
Maybe WSJ needs to put this behind the paywall:
Russell 2000 100.50
http://online.wsj.com/mdc/public/page/2_3021-peyield.html
Caveat idolator
We are a country full of mocking ash-holes, until we aren't.
WoWser! What about the rest of the ishare ETF's methodology... like maybe the SP500 or the Russel?
The same. Here is the IVV fact sheet.
Thanks Tyler...I think! I wonder if if anyone in a corner office with their panoramic view is muttering ... OH SHIT!!
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
I wonder if there are any gems of this nature deep in the anals of some report about BLK
Why is anyone consider staying in this markets is beyond me. Gamblers?
Simple--It is the blind squirrel/acorn syndrom.
Got Nuts ?
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! ;)
Printing the next $ 4 trillion might be interesting.
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."
When all are betting on $4 trln it won't be enough. Try $40 trln.
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.
Would really like to see the actual PE for S&P 500 ETF!
dafuq
How is this not insanely illegal? I actually bursted into laughter when I read the disclaimer.
That which is illegal in made legal for the financial criminals. Anything you do is illegal.
So, in other words, the crappy companies are excluded. Brilliant.
I assume this also applies to other ETFS?
Good catch.
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
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.
Wow Russell just turned red!
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?
it is not like anyone is using real money,
are they?
"It is not like anyone is using real money,
are they?"
No, fiat, bitemecoin, fairypubics, unicorn farts, and eye of newt
to the BISmobile? doesn't have the same ring to it.
The department of BLS taught them well... I don't see how that tiny disclaimer indemnifies them if that fund goes tits up.
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.
I wonder what the $ value that 80% of excluded companies represents? ( of total fund value)
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.
Fraud and corruption are endemic toward the end of historic credit bubbles.
Is there an ETF for that?
GLD & SLV
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).
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.
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.
Can you short an ETF?
BIS = ultrashort Nasdaq biotech index
My accountant says I can do my taxes like that. Think it'll be OK with the IRS?
82.5=<100=Bullish=go long
Earnings, like deficits, don't matter.
And cotton candy is a wholesome nutritious food.
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.
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.
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.
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?
GAAP EPS:
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.
S&P 666 true valuation.
p.s. - Mandy Drury showing some nice cleavage today.
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?
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?
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...
"..."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'." · " ....
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...
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
The Cubs are going to go 55-0 this year...because they won't count the "negative victories".
No worries. Chairwoman Yellen sees no bubble, hears no bubble and says no bubble. Nu, who are you to argue???
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.
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.
Fundermentals......Pfffttt... If Amazon can have a 3500 multiple so can IBB. Buy! Buy! Buy!
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.
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.
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...
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.
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
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.
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.
James Grant is a great financial reporter and an original thinker.
Any income I make over $100 I'm just not going to count. The fedgov would be OK with that, right?
"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.
It's all nuts and if your buying the negative interest (war) Bonds, then stocks at P/E x100 will still be attractive.
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.