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 caused the industry to lag recently - over the past six months, the collective 2.5% gain for healthcare stocks has fallen short of the S&P 500’s 4.7% 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.
Regeneron (REGN)
Market Cap: $69.83 billion
Founded by scientists who wanted to build a company where science could thrive, Regeneron Pharmaceuticals (NASDAQ: REGN) develops and commercializes medicines for serious diseases, with key products treating eye conditions, allergic diseases, cancer, and other disorders.
Why Does REGN Worry Us?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6.7% over the last two years was below our standards for the healthcare sector
- 20.5 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Diminishing returns on capital suggest its earlier profit pools are drying up
Regeneron’s stock price of $680.03 implies a valuation ratio of 15.2x forward P/E. Check out our free in-depth research report to learn more about why REGN doesn’t pass our bar.
AdaptHealth (AHCO)
Market Cap: $1.78 billion
With a network of approximately 680 locations serving patients across all 50 states, AdaptHealth (NASDAQ: AHCO) provides home medical equipment, supplies, and related services to patients with chronic conditions like sleep apnea, diabetes, and respiratory disorders.
Why Is AHCO Not Exciting?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Issuance of new shares over the last five years caused its earnings per share to fall by 6.4% annually while its revenue grew
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
AdaptHealth is trading at $13.08 per share, or 13.3x forward P/E. Read our free research report to see why you should think twice about including AHCO in your portfolio.
Charles River Laboratories (CRL)
Market Cap: $8.08 billion
Named after the Massachusetts river where it was founded in 1947, Charles River Laboratories (NYSE: CRL) provides non-clinical drug development services, research models, and manufacturing support to pharmaceutical and biotechnology companies.
Why Are We Wary of CRL?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Forecasted revenue decline of 2.1% for the upcoming 12 months implies demand will fall even further
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $163.78 per share, Charles River Laboratories trades at 15.1x forward P/E. Dive into our free research report to see why there are better opportunities than CRL.
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