Personal health and wellness is one of the many secular tailwinds for healthcare companies. But speed bumps such as inventory destockings have persisted in the wake of COVID-19, limiting growth. This has capped returns as the industry’s six-month gain of 13.5% has lagged the S&P 500’s 22.9% climb.
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 boasting a durable advantage and two best left ignored.
Two Healthcare Stocks to Sell:
Zimmer Biomet (ZBH)
Market Cap: $20.44 billion
With a history dating back to 1927 and a presence in over 100 countries worldwide, Zimmer Biomet (NYSE: ZBH) designs and manufactures orthopedic products including knee and hip replacements, surgical tools, and robotic technologies for joint reconstruction and spine surgeries.
Why Are We Cautious About ZBH?
- Annual revenue growth of 2.6% over the last five years was below our standards for the healthcare sector
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $103.16 per share, Zimmer Biomet trades at 12.4x forward P/E. To fully understand why you should be careful with ZBH, check out our full research report (it’s free for active Edge members).
Acadia Healthcare (ACHC)
Market Cap: $2.17 billion
With a network of over 250 facilities serving patients in 38 states and Puerto Rico, Acadia Healthcare (NASDAQ: ACHC) operates facilities providing mental health and substance use disorder treatment services across the United States.
Why Are We Hesitant About ACHC?
- Disappointing admissions over the past two years indicate demand is soft and that the company may need to revise its strategy
- 24.8 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Acadia Healthcare is trading at $23.95 per share, or 9.3x forward P/E. If you’re considering ACHC for your portfolio, see our FREE research report to learn more.
One Healthcare Stock to Watch:
ResMed (RMD)
Market Cap: $38.71 billion
Founded in 1989 to address the then-underdiagnosed condition of sleep apnea, ResMed (NYSE: RMD) develops cloud-connected medical devices and software solutions that treat sleep apnea, COPD, and other respiratory disorders for home and clinical use.
Why Do We Like RMD?
- Constant currency growth averaged 10.3% over the past two years, showing it can expand globally regardless of the macroeconomic environment
- Incremental sales significantly boosted profitability as its annual earnings per share growth of 14.9% over the last five years outstripped its revenue performance
- Free cash flow margin increased by 12.5 percentage points over the last five years, giving the company more capital to invest or return to shareholders
ResMed’s stock price of $265.26 implies a valuation ratio of 24.6x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.
High-Quality Stocks for All Market Conditions
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