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 11.9%. This drop is a noticeable divergence from the S&P 500’s 4.3% return.

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. With that said, here are three healthcare stocks we’re steering clear of.

Merit Medical Systems (MMSI)

Market Cap: $5.03 billion

Founded in 1987 and now offering over 1,700 patented products across global markets, Merit Medical Systems (NASDAQ: MMSI) manufactures and markets specialized medical devices used in minimally invasive procedures for cardiology, radiology, oncology, critical care, and endoscopy.

Why Are We Cautious About MMSI?

1. Sales trends were unexciting over the last five years as its 6.8% annual growth was below the typical healthcare company
2. Subscale operations are evident in its revenue base of $1.39 billion, meaning it has fewer distribution channels than its larger rivals
3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $86.06 per share, Merit Medical Systems trades at 22.7x forward P/E. Read our free research report to see why you should think twice about including MMSI in your portfolio.

Addus HomeCare (ADUS)

Market Cap: $2.00 billion

Serving approximately 66,000 clients across 22 states with a focus on "dual eligible" Medicare and Medicaid beneficiaries, Addus HomeCare (NASDAQ: ADUS) provides in-home personal care, hospice, and home health services to elderly, chronically ill, and disabled individuals.

Why Does ADUS Give Us Pause?

1. Revenue base of $1.21 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale

Addus HomeCare is trading at $110.39 per share, or 17.8x forward P/E. To fully understand why you should be careful with ADUS, check out our full research report (it’s free).

Privia Health (PRVA)

Market Cap: $2.47 billion

Operating in 13 states and the District of Columbia with over 4,300 providers serving more than 4.8 million patients, Privia Health (NASDAQ: PRVA) is a technology-driven company that helps physicians optimize their practices, improve patient experiences, and transition to value-based care models.

Why Does PRVA Worry Us?

1. Subscale operations are evident in its revenue base of $1.80 billion, meaning it has fewer distribution channels than its larger rivals
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Negative returns on capital show management lost money while trying to expand the business

Privia Health’s stock price of $20.30 implies a valuation ratio of 23.8x forward P/E. Read our free research report to see why you should think twice about including PRVA in your portfolio.

Stocks We Like More

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