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 15.5%. This drop was worse than the S&P 500’s 10% fall.
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 best left ignored.
LifeStance Health Group (LFST)
Market Cap: $2.58 billion
With over 6,600 licensed mental health professionals treating more than 880,000 patients annually, LifeStance Health (NASDAQ: LFST) provides outpatient mental health services through a network of clinicians offering psychiatric evaluations, psychological testing, and therapy across 33 states.
Why Are We Cautious About LFST?
- Modest revenue base of $1.25 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 6.6 percentage points
- Negative returns on capital show that some of its growth strategies have backfired
At $6.70 per share, LifeStance Health Group trades at 218.9x forward price-to-earnings. To fully understand why you should be careful with LFST, check out our full research report (it’s free).
Quest (DGX)
Market Cap: $18.18 billion
Processing approximately one-third of the adult U.S. population's lab tests annually, Quest Diagnostics (NYSE: DGX) provides laboratory testing and diagnostic information services to patients, physicians, hospitals, and other healthcare providers across the United States.
Why Are We Wary of DGX?
- Underwhelming requisition volumes over the past two years indicate demand is soft and that the company may need to revise its strategy
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 7.8 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
Quest’s stock price of $163.61 implies a valuation ratio of 16.9x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than DGX.
GoodRx (GDRX)
Market Cap: $1.72 billion
Started in 2011 to tackle the problem of high prescription drug costs in America, GoodRx (NASDAQ: GDRX) operates a digital platform that helps consumers find lower prices on prescription medications through price comparison tools and discount codes.
Why Should You Sell GDRX?
- 1.7% annual revenue growth over the last two years was slower than its healthcare peers
- Revenue base of $792.3 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Negative returns on capital show management lost money while trying to expand the business
GoodRx is trading at $4.49 per share, or 10.8x forward price-to-earnings. Check out our free in-depth research report to learn more about why GDRX doesn’t pass our bar.
Stocks We Like More
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