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 harmed the industry’s returns - over the past six months, healthcare stocks have collectively shed 12.3%. This drawdown was noticeably worse than the S&P 500’s 1.9% loss.

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 we’re swiping left on.

Universal Health Services (UHS)

Market Cap: $12.17 billion

With a network spanning 39 states and three countries, Universal Health Services (NYSE: UHS) operates acute care hospitals and behavioral health facilities across the United States, United Kingdom, and Puerto Rico.

Why Are We Hesitant About UHS?

1. Poor comparable store sales performance over the past two years indicates it’s having trouble bringing new patients into its facilities
2. Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 1.2 percentage points
3. Free cash flow margin shrank by 3.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

Universal Health Services’s stock price of $188.81 implies a valuation ratio of 9.5x forward P/E. Check out our free in-depth research report to learn more about why UHS doesn’t pass our bar.

Owens & Minor (OMI)

Market Cap: $512.5 million

With roots dating back to 1882 and operations spanning approximately 80 countries, Owens & Minor (NYSE: OMI) is a healthcare solutions company that manufactures medical supplies, distributes products to healthcare providers, and delivers medical equipment directly to patients.

Why Does OMI Give Us Pause?

1. Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 3.2% for the last two years
2. Underwhelming 3.8% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Owens & Minor is trading at $6.67 per share, or 3.7x forward P/E. If you’re considering OMI for your portfolio, see our FREE research report to learn more.

Pfizer (PFE)

Market Cap: $132.8 billion

With roots dating back to 1849 when two German immigrants opened a fine chemicals business in Brooklyn, Pfizer (NYSE: PFE) is a global biopharmaceutical company that discovers, develops, manufactures, and sells medicines and vaccines for a wide range of diseases and conditions.

Why Are We Cautious About PFE?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Free cash flow margin shrank by 8.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Diminishing returns on capital suggest its earlier profit pools are drying up

At $23.40 per share, Pfizer trades at 7.8x forward P/E. Read our free research report to see why you should think twice about including PFE in your portfolio.

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