Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. Despite the rosy long-term prospects, short-term headwinds such as COVID inventory destocking have caused the industry to lag recently – over the past six months, the collective 3.7% gain for healthcare stocks has fallen short of the S&P 500’s 7.1% rise.
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 best left ignored.
Biogen (BIIB)
Market Cap: $28.56 billion
Founded in 1978 and pioneering treatments for some of medicine’s most complex challenges, Biogen (NASDAQ:BIIB) develops and markets therapies for neurological conditions, including multiple sclerosis, Alzheimer’s disease, spinal muscular atrophy, and rare diseases.
Why Are We Cautious About BIIB?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.6% annually over the last five years
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
- Waning returns on capital imply its previous profit engines are losing steam
Biogen is trading at $192.88 per share, or 14.2x forward P/E. Read our free research report to see why you should think twice about including BIIB in your portfolio.
Tandem Diabetes (TNDM)
Market Cap: $1.06 billion
With technology that automatically adjusts insulin delivery based on continuous glucose monitoring data, Tandem Diabetes Care (NASDAQ:TNDM) develops and manufactures automated insulin delivery systems that help people with diabetes manage their blood glucose levels.
Why Are We Out on TNDM?
- Earnings per share fell by 19.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Push for growth has led to negative returns on capital, signaling value destruction, and its falling returns suggest its earlier profit pools are drying up
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $15.64 per share, Tandem Diabetes trades at 20.2x forward EV-to-EBITDA. If you’re considering TNDM for your portfolio, see our FREE research report to learn more.
Universal Health Services (UHS)
Market Cap: $10.29 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 Does UHS Worry Us?
- Poor comparable store sales performance over the past two years indicates it’s having trouble bringing new patients into its facilities
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 4.2% for the last five years
Universal Health Services’s stock price of $171.76 implies a valuation ratio of 7.2x forward P/E. Dive into our free research report to see why there are better opportunities than UHS.
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