Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. 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 13.6% gain for healthcare stocks has fallen short of the S&P 500’s 25.5% rise.

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 resilient healthcare stock at the top of our wish list and two we’re passing on.

Two Healthcare Stocks to Sell:

Sotera Health Company (SHC)

Market Cap: $4.64 billion

With a critical role in ensuring the safety of millions of patients worldwide, Sotera Health (NASDAQGS:SHC) provides sterilization services, lab testing, and advisory services to ensure medical devices, pharmaceuticals, and food products are safe for use.

Why Are We Wary of SHC?

1. Annual revenue growth of 7.3% over the last five years was below our standards for the healthcare sector
2. Smaller revenue base of $1.12 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
3. Poor free cash flow margin of 1.1% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

At $16.33 per share, Sotera Health Company trades at 19.7x forward P/E. Read our free research report to see why you should think twice about including SHC in your portfolio.

Align Technology (ALGN)

Market Cap: $9.41 billion

Pioneering an alternative to traditional metal braces with nearly invisible plastic aligners, Align Technology (NASDAQ: ALGN) designs and manufactures Invisalign clear aligners, iTero intraoral scanners, and dental CAD/CAM software for orthodontic and restorative treatments.

Why Does ALGN Fall Short?

1. Disappointing clear aligner shipments over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
2. Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 7.5 percentage points
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Align Technology’s stock price of $129.74 implies a valuation ratio of 12.3x forward P/E. To fully understand why you should be careful with ALGN, check out our full research report (it’s free for active Edge members).

One Healthcare Stock to Watch:

BioMarin Pharmaceutical (BMRN)

Market Cap: $10.17 billion

Pioneering treatments for conditions that often had no previous therapeutic options, BioMarin Pharmaceutical (NASDAQ: BMRN) develops and commercializes therapies that address the root causes of rare genetic disorders, particularly those affecting children.

Why Does BMRN Stand Out?

1. Market share has increased this cycle as its 17.1% annual revenue growth over the last two years was exceptional
2. Performance over the past five years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 22.2% outpaced its revenue gains
3. Free cash flow margin increased by 13.6 percentage points over the last five years, giving the company more capital to invest or return to shareholders

BioMarin Pharmaceutical is trading at $53.50 per share, or 13.2x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.

Stocks We Like Even More

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