From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But speed bumps such as inventory destockings have persisted in the wake of COVID-19, and over the past six months, the industry has pulled back by 9.4%. This performance was disheartening since the S&P 500 held its ground.
A cautious approach is imperative when dabbling in these businesses as regulation is another unpredictable element that can affect their earnings potential. With that said, here are three healthcare stocks best left ignored.
Tandem Diabetes (TNDM)
Market Cap: $1.31 billion
With technology that automatically adjusts insulin delivery based on continuous glucose monitoring data, Tandem Diabetes Care (NASDAQ: TNDM) develops and manufactures automated insulin delivery systems that help people with diabetes manage their blood glucose levels.
Why Is TNDM Risky?
- Declining pump shipments over the past two years indicate demand is soft and that the company may need to revise its strategy
- Earnings per share fell by 34.7% annually over the last five years while its revenue grew, partly because it diluted shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Tandem Diabetes’s stock price of $19.75 implies a valuation ratio of 37.1x forward EV-to-EBITDA. To fully understand why you should be careful with TNDM, check out our full research report (it’s free).
Labcorp (LH)
Market Cap: $20.12 billion
With over 600 million tests performed annually and involvement in 90% of FDA-approved drugs in 2023, Labcorp (NYSE: LH) provides laboratory testing services and drug development solutions to doctors, hospitals, pharmaceutical companies, and patients worldwide.
Why Does LH Fall Short?
- 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
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 10 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
At $240.43 per share, Labcorp trades at 15.1x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than LH.
BrightSpring Health Services (BTSG)
Market Cap: $3.05 billion
Founded in 1974, BrightSpring Health Services (NASDAQ: BTSG) offers home health care, hospice, neuro-rehabilitation, and pharmacy services.
Why Are We Wary of BTSG?
- Costs have risen faster than its revenue over the last two years, causing its adjusted operating margin to decline by 1.3 percentage points
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6.2 percentage points
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
BrightSpring Health Services is trading at $17.21 per share, or 32.8x forward price-to-earnings. If you’re considering BTSG for your portfolio, see our FREE research report to learn more.
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