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 harmed the industry’s returns - over the past six months, healthcare stocks have collectively shed 13.7%. This drawdown is a stark contrast from the S&P 500’s 3.6% gain.
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. Taking that into account, here are three healthcare stocks we’re passing on.
GE HealthCare (GEHC)
Market Cap: $32.3 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 Cautious About GEHC?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Performance over the past four years shows its incremental sales were much less profitable, as its earnings per share fell by 3.7% annually
- Free cash flow margin dropped by 9.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
GE HealthCare is trading at $70.93 per share, or 17.2x forward P/E. To fully understand why you should be careful with GEHC, check out our full research report (it’s free).
Universal Health Services (UHS)
Market Cap: $10.61 billion
With a network spanning 39 states and three countries, Universal Health Services (NYSE:UHS) operates acute care hospitals and behavioral health facilities across the United States, United Kingdom, and Puerto Rico.
Why Does UHS Worry Us?
- Poor comparable store sales performance over the past two years indicates it’s having trouble bringing new patients into its facilities
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 1.3 percentage points
- Poor free cash flow margin of 4.1% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Universal Health Services’s stock price of $164.70 implies a valuation ratio of 8.1x forward P/E. Check out our free in-depth research report to learn more about why UHS doesn’t pass our bar.
Revvity (RVTY)
Market Cap: $10.45 billion
Formerly known as PerkinElmer until its rebranding in 2023, Revvity (NYSE:RVTY) provides health science technologies and services that support the complete workflow from discovery to development and diagnosis to cure.
Why Do We Pass on RVTY?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Inability to adjust its cost structure while its revenue declined over the last five years led to a 9.9 percentage point drop in the company’s adjusted operating margin
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $88.68 per share, Revvity trades at 16.8x forward P/E. If you’re considering RVTY for your portfolio, see our FREE research report to learn more.
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