From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Shareholders who bet on the industry have seen decent returns lately as healthcare stocks were up 4.1% over the past six months, almost identical to the S&P 500.
Nevertheless, investors should tread carefully as the sector is heavily regulated, and businesses can be negatively impacted if the rules change. With that said, here are three healthcare stocks we’re steering clear of.
STERIS (STE)
Market Cap: $21.78 billion
With a mission critical role in preventing healthcare-associated infections, STERIS (NYSE: STE) provides infection prevention products, sterilization services, and medical equipment that help healthcare facilities and life science companies maintain sterile environments.
Why Do We Think Twice About STE?
- Underwhelming 5% return on capital reflects management’s difficulties in finding profitable growth opportunities
STERIS is trading at $222.13 per share, or 21x forward P/E. Check out our free in-depth research report to learn more about why STE doesn’t pass our bar.
Zimmer Biomet (ZBH)
Market Cap: $17.94 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 Does ZBH Give Us Pause?
- Muted 5.3% annual revenue growth over the last five years shows its demand lagged behind its healthcare peers
- Estimated sales growth of 3.8% for the next 12 months implies demand will slow from its two-year trend
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $91.97 per share, Zimmer Biomet trades at 11.1x forward P/E. If you’re considering ZBH for your portfolio, see our FREE research report to learn more.
LifeStance Health Group (LFST)
Market Cap: $2.62 billion
With over 6,600 licensed mental health professionals treating more than 880,000 patients annually, LifeStance Health (NASDAQ: LFST) provides outpatient mental health services through a network of clinicians offering psychiatric evaluations, psychological testing, and therapy across 33 states.
Why Does LFST Worry Us?
- Subscale operations are evident in its revenue base of $1.42 billion, meaning it has fewer distribution channels than its larger rivals
- Poor free cash flow margin of 0.5% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Negative returns on capital show that some of its growth strategies have backfired
LifeStance Health Group’s stock price of $6.74 implies a valuation ratio of 23.3x forward P/E. To fully understand why you should be careful with LFST, check out our full research report (it’s free).
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