From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. 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’s return was flat while the S&P 500 climbed by 16.4%.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here is one healthcare stock poised to generate sustainable market-beating returns and two that may face trouble.
Two Healthcare Stocks to Sell:
Dentsply Sirona (XRAY)
Market Cap: $2.72 billion
With roots dating back to 1877 when it introduced the first dental electric drill, Dentsply Sirona (NASDAQ: XRAY) manufactures and sells professional dental equipment, technologies, and consumable products used by dentists and specialists worldwide.
Why Do We Think XRAY Will Underperform?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Negative returns on capital show management lost money while trying to expand the business, and its shrinking returns suggest its past profit sources are losing steam
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Dentsply Sirona is trading at $13.75 per share, or 7x forward P/E. If you’re considering XRAY for your portfolio, see our FREE research report to learn more.
Encompass Health (EHC)
Market Cap: $12.47 billion
With a network of 161 specialized facilities across 37 states and Puerto Rico, Encompass Health (NYSE: EHC) operates inpatient rehabilitation hospitals that help patients recover from strokes, hip fractures, and other debilitating conditions.
Why Are We Wary of EHC?
- Sales trends were unexciting over the last five years as its 4.3% annual growth was below the typical healthcare company
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 1 percentage points
At $123.81 per share, Encompass Health trades at 23.4x forward P/E. Check out our free in-depth research report to learn more about why EHC doesn’t pass our bar.
One Healthcare Stock to Buy:
DexCom (DXCM)
Market Cap: $30.02 billion
Founded in 1999 and receiving its first FDA approval in 2006, DexCom (NASDAQ: DXCM) develops and sells continuous glucose monitoring systems that allow people with diabetes to track their blood sugar levels without repeated finger pricks.
Why Are We Backing DXCM?
- Average organic revenue growth of 17.8% over the past two years demonstrates its ability to expand independently without relying on acquisitions
- Earnings growth has massively outpaced its peers over the last five years as its EPS has compounded at 17.5% annually
- Free cash flow margin grew by 8.6 percentage points over the last five years, giving the company more chips to play with
DexCom’s stock price of $75.05 implies a valuation ratio of 32.9x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free.
Stocks We Like Even More
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