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 8.4%. This drop was disappointing since the S&P 500 stood firm.
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. Taking that into account, here are three healthcare stocks we’re steering clear of.
Haemonetics (HAE)
Market Cap: $3.28 billion
With roots dating back to 1971 and a mission to improve blood-related healthcare, Haemonetics (NYSE: HAE) provides specialized medical devices and software for blood collection, processing, and management across plasma centers, blood banks, and hospitals.
Why Does HAE Worry Us?
- Sales trends were unexciting over the last five years as its 6.6% annual growth was below the typical healthcare company
- Revenue base of $1.37 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Forecasted revenue decline of 4.4% for the upcoming 12 months implies demand will fall off a cliff
Haemonetics is trading at $65.70 per share, or 12.8x forward price-to-earnings. If you’re considering HAE for your portfolio, see our FREE research report to learn more.
The Pennant Group (PNTG)
Market Cap: $835.3 million
Spun off from The Ensign Group in 2019 to focus on non-skilled nursing healthcare services, Pennant Group (NASDAQ: PNTG) operates home health, hospice, and senior living facilities across 13 western and midwestern states, serving patients of all ages including seniors.
Why Do We Think Twice About PNTG?
- Revenue base of $695.2 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Free cash flow margin dropped by 4.4 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Underwhelming 6.3% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $23.51 per share, The Pennant Group trades at 22.3x forward price-to-earnings. To fully understand why you should be careful with PNTG, check out our full research report (it’s free).
Avantor (AVTR)
Market Cap: $11.35 billion
With roots dating back to 1904 and embedded in virtually every stage of scientific research and production, Avantor (NYSE: AVTR) provides mission-critical products, materials, and services to customers in biopharma, healthcare, education, and advanced technology industries.
Why Are We Wary of AVTR?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Sales are projected to tank by 2.1% over the next 12 months as its demand continues evaporating
- Overall productivity fell over the last two years as its plummeting sales were accompanied by a decline in its adjusted operating margin
Avantor’s stock price of $16.67 implies a valuation ratio of 15.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why AVTR doesn’t pass our bar.
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