Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. But financial performance has lagged recently as players offloaded surplus COVID inventories in 2023 and 2024, a headwind for overall demand. The result? Over the past six months, the industry has tumbled by 1.4%. This performance is a stark contrast from the S&P 500’s 15.7% gain.

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.

CooperCompanies (COO)

Market Cap: $13.3 billion

With a history dating back to 1958 and a portfolio spanning two distinct healthcare segments, Cooper Companies (NASDAQ: COO) develops and manufactures medical devices focused on vision care through contact lenses and women's health including fertility products and services.

Why Does COO Worry Us?

1. Sales trends were unexciting over the last two years as its 7.3% annual growth was below the typical healthcare company
2. 8.3 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
3. ROIC of 5.1% reflects management’s challenges in identifying attractive investment opportunities

CooperCompanies is trading at $66.99 per share, or 15.4x forward P/E. Dive into our free research report to see why there are better opportunities than COO.

U.S. Physical Therapy (USPH)

Market Cap: $1.25 billion

With a nationwide footprint spanning 671 clinics across 42 states, U.S. Physical Therapy (NYSE: USPH) operates a network of outpatient physical therapy clinics and provides industrial injury prevention services to employers across the United States.

Why Do We Think Twice About USPH?

1. Subscale operations are evident in its revenue base of $729.6 million, meaning it has fewer distribution channels than its larger rivals
2. Free cash flow margin dropped by 9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Waning returns on capital imply its previous profit engines are losing steam

U.S. Physical Therapy’s stock price of $82.52 implies a valuation ratio of 31.8x forward P/E. Read our free research report to see why you should think twice about including USPH in your portfolio.

Illumina (ILMN)

Market Cap: $14.18 billion

Pioneering the ability to read the human genome at unprecedented speed and affordability, Illumina (NASDAQ: ILMN) develops and sells advanced DNA sequencing and microarray technologies that allow researchers and clinicians to analyze genetic variations and functions.

Why Do We Pass on ILMN?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Earnings per share fell by 6.3% annually over the last five years while its revenue grew, partly because it diluted shareholders
3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $92.16 per share, Illumina trades at 20.7x forward P/E. To fully understand why you should be careful with ILMN, check out our full research report (it’s free).

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