Personal health and wellness is one of the many secular tailwinds for healthcare companies. Despite the rosy long-term prospects, short-term headwinds such as COVID inventory destocking have harmed the industry’s returns - over the past six months, healthcare stocks have collectively shed 12.3%. This drawdown was noticeably worse than the S&P 500’s 1.9% loss.
Investors should tread carefully as the influx of venture capital has also ushered in a new wave of competition. Keeping that in mind, here are three healthcare stocks we’re swiping left on.
Universal Health Services (UHS)
Market Cap: $12.17 billion
With a network spanning 39 states and three countries, Universal Health Services (NYSE: UHS) operates acute care hospitals and behavioral health facilities across the United States, United Kingdom, and Puerto Rico.
Why Are We Hesitant About UHS?
- Poor comparable store sales performance over the past two years indicates it’s having trouble bringing new patients into its facilities
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 1.2 percentage points
- Free cash flow margin shrank by 3.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Universal Health Services’s stock price of $188.81 implies a valuation ratio of 9.5x forward P/E. Check out our free in-depth research report to learn more about why UHS doesn’t pass our bar.
Owens & Minor (OMI)
Market Cap: $512.5 million
With roots dating back to 1882 and operations spanning approximately 80 countries, Owens & Minor (NYSE: OMI) is a healthcare solutions company that manufactures medical supplies, distributes products to healthcare providers, and delivers medical equipment directly to patients.
Why Does OMI Give Us Pause?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 3.2% for the last two years
- Underwhelming 3.8% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Owens & Minor is trading at $6.67 per share, or 3.7x forward P/E. If you’re considering OMI for your portfolio, see our FREE research report to learn more.
Pfizer (PFE)
Market Cap: $132.8 billion
With roots dating back to 1849 when two German immigrants opened a fine chemicals business in Brooklyn, Pfizer (NYSE: PFE) is a global biopharmaceutical company that discovers, develops, manufactures, and sells medicines and vaccines for a wide range of diseases and conditions.
Why Are We Cautious About PFE?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Free cash flow margin shrank by 8.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $23.40 per share, Pfizer trades at 7.8x forward P/E. Read our free research report to see why you should think twice about including PFE in your portfolio.
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