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 9.8% has lagged the S&P 500’s 22.6% climb.
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 swiping left on.
GE HealthCare (GEHC)
Market Cap: $34.16 billion
Spun off from industrial giant General Electric in 2023 after over a century as its healthcare division, GE HealthCare (NASDAQ: GEHC) provides medical imaging equipment, patient monitoring systems, diagnostic pharmaceuticals, and AI-enabled healthcare solutions to hospitals and clinics worldwide.
Why Are We Hesitant About GEHC?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Earnings per share fell by 3.8% annually over the last four years while its revenue grew, showing its incremental sales were much less profitable
- Free cash flow margin shrank by 7.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
GE HealthCare’s stock price of $74.03 implies a valuation ratio of 15.6x forward P/E. Dive into our free research report to see why there are better opportunities than GEHC.
Quest (DGX)
Market Cap: $19.55 billion
Processing approximately one-third of the adult U.S. population's lab tests annually, Quest Diagnostics (NYSE: DGX) provides laboratory testing and diagnostic information services to patients, physicians, hospitals, and other healthcare providers across the United States.
Why Are We Cautious About DGX?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 5.3% for the last five years
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 9.7 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
At $175.76 per share, Quest trades at 17.3x forward P/E. Read our free research report to see why you should think twice about including DGX in your portfolio.
Corcept (CORT)
Market Cap: $7.61 billion
Focusing on the powerful stress hormone that affects everything from metabolism to immune function, Corcept Therapeutics (NASDAQ: CORT) develops and markets medications that modulate cortisol to treat endocrine disorders, cancer, and neurological diseases.
Why Do We Think Twice About CORT?
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 16.9 percentage points
- Earnings per share fell by 2.8% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Diminishing returns on capital suggest its earlier profit pools are drying up
Corcept is trading at $73.79 per share, or 73.4x forward P/E. Check out our free in-depth research report to learn more about why CORT doesn’t pass our bar.
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