By Philip van Doorn
Michael Taylor runs the Simplify Health Care ETF, which donates its management fees to Susan G. Komen for the Cure to fund breast cancer research and help people with the disease.
The Simplify Health Care ETF has grown to $136 million in assets in two and a half years. It's never easy for an actively managed fund to outperform its benchmark or a broad stock index, but Michael Taylor, the fund's lead manager, has done it so far.
During an interview with MarketWatch, Taylor discussed the fund's top holdings and also pointed out a stock the fund owns that is outside of the healthcare sector and that he believes has the potential to provide exponential returns.
The Simplify Health Care PINK ETF was launched on October 7, 2021, and shares began trading the next day. The fund's annual expenses amount to 0.50% of assets under management and it donates all of its net profits to Susan G. Komen for the Cure, a non-profit organization that works to support people with breast cancer and fund research on the prevention and treatment of the disease. .
While the fund's management fees are donated, Taylor said he would make profits along with the fund because he is one of its three largest shareholders.
PINK has been performing well since its inception, as you can see below.
Early in his career, Taylor earned a master's degree in biotechnology from Johns Hopkins University and worked on gene therapy research projects at GenVac before earning a master's degree in business from the University of Rochester and moving into a career in money management, starting at Oppenheimer. Throughout her career she has managed several portfolios of health funds and health-oriented hedge funds.
He described his approach to the Simplify Health Care ETF as "idiosyncratic," not only because of his stock selection but because of his ability to move more nimbly than competitors who run very large funds to adjust investment positions.
Before we move on to Taylor's comments on specific companies, here are the fund's top 10 holdings:
Company Ticker % of Simplify Health Care ETF as of March 28
Intuitive Surgical Inc. ISRG 9.5%
Sarepta Therapeutics Inc. SRPT 8.6%
Cigna Group CI 6.5%
PureCycle Technologies Inc. PCT 4.9%
Cooper Cos. COO 4.7%
Align Technology Inc. ALGN 4.6%
Merck & Co. MRK 4.6%
Eli Lilly & Co. LLY 4.6%
Shockwave Medical Inc. SWAV 3.6%
Thermo Fisher Scientific Inc. TMO 3.5%
Source: Simplify ETFs
Comments on five stocks
Intuitive Surgical
PINK's largest holding is Intuitive Surgical Inc. (ISRG). Taylor believes the company's revenue and profit estimates among analysts working for brokerage firms are too low, because the company plans to bring new robotic surgery equipment to market this year. Intuitive is trading at valuations of 60.4 times the consensus earnings per share estimate for the next 12 months among analysts surveyed by FactSet, and a forward price-to-sales ratio of 16.8. These are very high compared to a Forward P/E of 21.1 for the S&P 500 SPX and a Forward Price/Sales ratio of 2.7 for the index.
On the other hand, Intuitive's five-year average forward P/E has been 50.8, according to FactSet. Looking ahead, based on calendar year estimates, the company is expected to grow its sales at a compound annual growth rate of 13.9% from 2023 to 2025, with an expected EPS CAGR of 12.9%, according to consensus estimates. These compare to an expected Sales CAGR of 5.3% and EPS CAGR of 12.3% for the S&P 500.
Sarepta Therapeutics
The fund's second-largest holding is Sarepta Therapeutics Inc. (SRPT), which is awaiting Food and Drug Administration approval for its new therapy for Duchenne muscular dystrophy. Taylor believes stocks could double due to the high price of the treatment, assuming it is approved. "Sarepta has the opportunity to get an FDA label to treat all DMD, which would make it a $5 billion drug for most of the next few years," he said. The company's market capitalization is $11.6 billion.
If Sarepta fails to gain FDA approval for its DMD treatment, Taylor expects the stock to fall 30%. But he is confident that his thesis will succeed. "And because I treat it like it's my money, we have an important position," he said. "Nothing that could destroy us, but enough for us to make significant profits."
Cigna
The third-largest holding in the PINK portfolio is Cigna Group (CI), which is one of six S&P 500 companies classified by FactSet as managed care providers (or health maintenance organizations). What sets Cigna apart, according to Taylor, is that almost all of its business comes from commercial customers (employer-sponsored health insurance plans), while the other five players focus on Medicare Advantage plans. Cigna stock has returned 44% over the past year.
Cigna stock is trading at a low Forward P/E of 12.4. It's "cheap because investors are overlooking that space. There's always an imminent threat to national healthcare," Taylor said. He added that competing health care fund managers "got it wrong" in their analysis of the HMO space, because they "didn't figure out which one would outperform or the right size."
Eli Lilly
PINK owns shares of Eli Lilly & Co. (LLY), which have soared on the success of the company's GLP-1 drugs to treat diabetes and help people lose weight. But Taylor is staying away from Lilly's biggest competitor, Novo Nordisk A/S (NVO), because the latter's "prescribing trends for its GLP-1 are not in line with expectations" in the US market. He also said, "I think Lilly has the superior molecule: greater safety and greater efficacy."
He sees a long path of growth for GLP-1 drugs because they are now covered by Medicare for the treatment of diabetes, but are not yet covered for patients who need to lose weight. With so many people at risk for costly medical problems that can result from obesity, there is potential for a major expansion of this category of drugs, as Medicare and insurers realize the benefit of covering GLP-1 for more purposes, Taylor said.
A play outside of healthcare
In the healthcare sector, especially biotechnology, binary events can make investors a lot of money. A company's stock price can soar as the expected FDA approval of a new drug, treatment or device approaches, and can crash if it fails to win approval.
The Simplify Health Care ETF can have up to 20% of its portfolio invested outside of the healthcare sector, and Taylor cited PureCycle Technologies Inc. (PCT) as an example of such a stock. And it sure is a binary game. The company has a market capitalization of less than $1 billion. It has technology licensed from Procter & Gamble Co. (PG) that allows the recycling of polypropylene.
Polypropylene is a commonly used plastic that people often throw into recycling bins. Although it is classified by waste management companies, this type of plastic is not recycled. PureCycle expects its facility in Ironton, Ohio, which was built in 2023, to be fully operational this year.
"[PureCycle] is about to go massively global, with three plants in Asia, one in Europe and two in the United States," Taylor said. He also said demand for PureCycle's services was "off the charts" and that the Ironton plant He was "20 years behind" in business.
He said it remains to be seen if [PureCycle's] Recycling polypropylene into pellets for industrial use would eventually result in higher profit margins than manufacturers making new plastic from petroleum. But he also called PureCycle "a pure solo game with a [intellectual property] pit."
"[PureCycle] it's in PINK because I hope to have 50 bags over the next decade. There's nothing like it," Taylor stated. By "50-bagger" he meant a potential 50-fold gain for the stock.
Performance comparison
Since the Simplify Health Care ETF is less than three years old, we don't have many periods to compare its performance to benchmarks or other funds. Therefore, the table below includes total returns since the fund began trading on October 8, 2021 through Friday, but also for other periods, most of which exclude this relatively new fund.
The performance comparison includes the Fidelity MSCI Health Care Index ETF FHLC, which is passively managed to track the MSCI USA IMI Health Care 25/50 Index. This index is designed to capture the performance of large-, mid-, and small-cap U.S. healthcare stocks.
The table also includes the performance of the Health Care Select Sector SPDR ETF XLV, which tracks the healthcare sector of the S&P 500, and the SPDR S&P 500 ETF Trust SPY, which tracks the entire S&P 500. At the bottom of the list are the returns of two large, actively managed competitors that Taylor named: the $15.4 billion T. Rowe Price Health Sciences Fund Class I shares THISX (those with the lowest management fee) and the $7.9 billion Fidelity Select Health Care Portfolio FSPHX.
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