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 4.1% gain for healthcare stocks has fallen short of the S&P 500’s 10.3% rise.
A cautious approach is imperative when dabbling in these businesses as regulation is another unpredictable element that can affect their earnings potential. With that said, here are three healthcare stocks we’re passing on.
Neogen (NEOG)
Market Cap: $2.02 billion
Founded in 1981 and operating at the intersection of food safety and animal health, Neogen (NASDAQ: NEOG) develops and manufactures diagnostic tests and related products to detect dangerous substances in food and pharmaceuticals for animal health.
Why Should You Sell NEOG?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.2% annually over the last two years
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
Neogen is trading at $9.32 per share, or 36.3x forward P/E. If you’re considering NEOG for your portfolio, see our FREE research report to learn more.
Henry Schein (HSIC)
Market Cap: $8.69 billion
With a vast inventory of over 300,000 products stocked in distribution centers spanning more than 5.3 million square feet worldwide, Henry Schein (NASDAQ: HSIC) is a global distributor of healthcare products and services primarily to dental practices, medical offices, and other healthcare facilities.
Why Are We Wary of HSIC?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Estimated sales growth of 3.6% for the next 12 months is soft and implies weaker demand
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Henry Schein’s stock price of $76.33 implies a valuation ratio of 13.9x forward P/E. Dive into our free research report to see why there are better opportunities than HSIC.
Evolent Health (EVH)
Market Cap: $438.7 million
Founded in 2011 to transform how healthcare is delivered to patients with complex needs, Evolent Health (NYSE: EVH) provides specialty care management services and technology solutions that help health plans and providers deliver better care for patients with complex conditions.
Why Does EVH Worry Us?
- Weak average lives on platform over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Negative returns on capital show that some of its growth strategies have backfired, and its falling returns suggest its earlier profit pools are drying up
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $3.90 per share, Evolent Health trades at 14.5x forward P/E. Read our free research report to see why you should think twice about including EVH in your portfolio.
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