Jonathan Kitchen
The last time I covered Tekla Healthcare Investors (NYSE:HQH) more than six months ago, the stock was trading around a price of $20. The price moved beyond $22 within a month, and then started falling, and is currently trading below $18. I recommended a buy, due to its strong and steady yields, which was well supported by its earnings. The yield that time was 8.8 percent, and was also the same for the past five years. I opined that income seeking investors would be delighted to hold this fund for the long term and would enjoy the quarterly incomes. Things haven’t changed much for this fund, and its biotechnology portfolio, in which it has made 55 percent of its entire investments, is performing the same way. The fund lost more than 16 percent of its value in the past 6 months, but has been successful in generating a higher yield than before.
The Biotechnology Portfolio Performing Almost the Same as 6 Months Back
In the last week of March, I mentioned that “almost 45 percent of its portfolio is invested in 12 large-cap (market capitalization over $12.5 billion) biotechnology stocks – Amgen Inc. (AMGN), Moderna (MRNA), Gilead Sciences Inc. (GILD), Regeneron Pharmaceuticals Inc. (REGN), Horizon Therapeutics Plc. (HZNP), Vertex Pharmaceuticals Inc. (VRTX), Illumina Inc. (ILMN), Biogen Inc. (BIIB), Seagen Inc. (SGEN), Alnylam Pharmaceuticals Inc. (ALNY), BioNTech SE (BNTX), and BeiGene Ltd. (BGNE). Out of these 12, only REGN and BNTX had been able to record double-digit growth. Vertex Pharmaceuticals Inc. grew by 8.13 percent, and the remaining 9 stocks (36 percent of total holdings) had a very poor year, recording huge price loss.”
The situation hasn’t improved since then. Now, top 12 large-cap investments in biotechnology stocks constitute almost 41.5 percent of Tekla Healthcare Investors, and BNTX and BGNE have been replaced by AbbVie Inc (ABBV) and Neurocrine Biosciences Inc (NBIX). BIIB, ALNY, NBIX, GILD, VRTX, REGN, and AMGN have posted positive price growth over the past 6 months. But only BIIB and ALNY grew in excess of 20 percent. This is encouraging at a time when almost all the sectors are performing poorly in the stock market. However, ILMN and HZNP recorded excessive price loss of 38 percent and 45 percent respectively, which neutralized the gains in above-mentioned stocks.
An interesting change in its biotechnology portfolio is its stake reduction in MRNA, which has lost more than 57 percent of its value during the past 1 year. One year back, Tekla Healthcare Investors had almost 9 percent of its fund invested in MRNA, which has been reduced to about 2 percent at present. In my opinion, the product pipeline is too narrow for MRNA to bet on it, especially when the fund aims to generate high yield, not exceptionally high growth. MRNA doesn’t pay any dividend at present, and didn’t pay any in the past, either. On the contrary, the other two holdings among its top 3 positions one year ago – AMGN, and GILD have been consistent in offering yields.
HQH’s Price Multiples and Performance Over the past 6 Months
Overall, Tekla Healthcare Investors suffered a price loss of 16.5 percent during the same period. The fund has invested only 9 percent in the lucrative healthcare segments of Health Care Equipment & Supplies, Medical Devices and Diagnostics and healthcare services. Earlier these segments constituted 16.7 percent of the total holdings. Despite all these, HQH has been able to generate much higher yield, and its trailing twelve months’ (TTM) yield stands at 10.23 percent. Average yield in this year stands almost 10 percent. Last time I doubted whether any shareholder would be tempted to liquidate HQH stock. I still stand by the same assumption that investors will expect the price growth to become positive somewhere in the future, and till that time they will enjoy close to double-digit dividend yield.
Tekla Healthcare Investors is currently trading at a discount of 10 percent from its net asset value (NAV). The price multiples too suggest a minor undervaluation. It has a Price/Earnings (P/E) ratio of 13.8 as compared to the average P/E of 17.6 of its peers. Price/Cash flow (P/CF) ratio of 4.48 also stood quite low of that of its peers (14.2). Price/Book (P/B) of 3.57 is marginally lower than peers’ average P/B of 3.8. All these make Tekla Healthcare Investors a good buying option, especially under the current economic situation. Investors can expect a close to double digit yield for many more years.
Investment Thesis
A consistent close to double-digit yield in an uncertain economic situation with multiple rate hikes makes Tekla Healthcare Investors an attractive stock to hold on to. As healthcare spending will not get severely hampered irrespective of interest rates or recession or deflation, the major biotechnology and pharmaceutical stocks are expected to perform relatively better under the current economic scenario. As HQH is able to generate strong and steady yield out of its current earnings and retained earnings, there is no reason, in my opinion, why income seeking investors will not hold on to this fund. A double-digit yield is attractive enough to make up for the consistent price loss suffered by this fund. I also presume that this fund is in a better position to hold up to its current price and register marginal growth, something we may not witness in most growth generating funds or stocks. As the fund trades at a good discount to its NAV, chances are high for this fund to gain in price. The price multiples also suggest a buy at the current price level.
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