From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Despite the rosy long-term prospects, short-term headwinds such as COVID inventory destocking have caused the industry to lag recently - over the past six months, the collective 7.5% gain for healthcare stocks has fallen short of the S&P 500’s 15.3% rise.

A cautious approach is imperative when dabbling in these businesses as regulation is another unpredictable element that can affect their earnings potential. Keeping that in mind, here are three healthcare stocks we’re passing on.

Enovis (ENOV)

Market Cap: $1.60 billion

With a focus on helping patients regain or maintain their natural motion, Enovis (NYSE: ENOV) develops and manufactures medical devices for orthopedic care, from injury prevention and pain management to joint replacement and rehabilitation.

Why Do We Pass on ENOV?

1. Sales tumbled by 6.5% annually over the last five years, showing market trends are working against its favor during this cycle
2. Push for growth has led to negative returns on capital, signaling value destruction, and its decreasing returns suggest its historical profit centers are aging
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Enovis is trading at $28.06 per share, or 8.6x forward P/E. Dive into our free research report to see why there are better opportunities than ENOV.

Henry Schein (HSIC)

Market Cap: $8.46 billion

With a vast inventory of over 300,000 products stocked in distribution centers spanning more than 5.3 million square feet worldwide, Henry Schein (NASDAQ: HSIC) is a global distributor of healthcare products and services primarily to dental practices, medical offices, and other healthcare facilities.

Why Do We Think Twice About HSIC?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Free cash flow margin shrank by 2.8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Waning returns on capital imply its previous profit engines are losing steam

Henry Schein’s stock price of $72.90 implies a valuation ratio of 13.9x forward P/E. If you’re considering HSIC for your portfolio, see our FREE research report to learn more.

Charles River Laboratories (CRL)

Market Cap: $8.27 billion

Named after the Massachusetts river where it was founded in 1947, Charles River Laboratories (NYSE: CRL) provides non-clinical drug development services, research models, and manufacturing support to pharmaceutical and biotechnology companies.

Why Are We Cautious About CRL?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Projected sales for the next 12 months are flat and suggest demand will be subdued
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $168.05 per share, Charles River Laboratories trades at 16x forward P/E. Read our free research report to see why you should think twice about including CRL in your portfolio.

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