From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But speed bumps such as inventory destockings have persisted in the wake of COVID-19, and over the past six months, the industry has pulled back by 6.3%. This drop is a far cry from the S&P 500’s 6.2% ascent.
While some businesses have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three healthcare stocks we’re steering clear of.
Zimmer Biomet (ZBH)
Market Cap: $18.53 billion
With a history dating back to 1927 and a presence in over 100 countries worldwide, Zimmer Biomet (NYSE:ZBH) designs and manufactures orthopedic products including knee and hip replacements, surgical tools, and robotic technologies for joint reconstruction and spine surgeries.
Why Does ZBH Give Us Pause?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $93.67 per share, Zimmer Biomet trades at 11.3x forward P/E. If you’re considering ZBH for your portfolio, see our FREE research report to learn more.
Select Medical (SEM)
Market Cap: $1.95 billion
With a nationwide network spanning 46 states and over 2,700 healthcare facilities, Select Medical (NYSE:SEM) operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers across the United States.
Why Are We Out on SEM?
- Declining admissions over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
- Free cash flow margin shrank by 13.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Select Medical’s stock price of $15.14 implies a valuation ratio of 13x forward P/E. Read our free research report to see why you should think twice about including SEM in your portfolio.
RadNet (RDNT)
Market Cap: $4.22 billion
With over 350 imaging facilities across seven states and a growing artificial intelligence division, RadNet (NASDAQ:RDNT) operates a network of outpatient diagnostic imaging centers across the United States, offering services like MRI, CT scans, PET scans, mammography, and X-rays.
Why Does RDNT Fall Short?
- Revenue base of $1.87 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Free cash flow margin dropped by 3.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Underwhelming 6.4% return on capital reflects management’s difficulties in finding profitable growth opportunities
RadNet is trading at $56.20 per share, or 106.1x forward P/E. Dive into our free research report to see why there are better opportunities than RDNT.
High-Quality Stocks for All Market Conditions
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