Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. But financial performance has lagged recently as players offloaded surplus COVID inventories in 2023 and 2024, a headwind for overall demand. The result? Over the past six months, the industry’s 5.8% return has trailed the S&P 500 by 1.9 percentage points.
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. Keeping that in mind, here are three healthcare stocks we’re passing on.
STAAR Surgical (STAA)
Market Cap: $1.35 billion
With over 2.5 million implants performed worldwide, STAAR Surgical (NASDAQ: STAA) designs and manufactures implantable lenses that correct vision problems without removing the eye's natural lens.
Why Do We Pass on STAA?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 13.8% annually over the last two years
- Free cash flow margin dropped by 29.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $26.88 per share, STAAR Surgical trades at 49.7x forward P/E. Read our free research report to see why you should think twice about including STAA in your portfolio.
Labcorp (LH)
Market Cap: $21.16 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 Do We Think Twice About LH?
- Sales tumbled by 1.6% annually over the last five years, showing market trends are working against its favor during this cycle
- 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 five years shows each sale was less profitable as its earnings per share dropped by 11.1% annually, worse than its revenue
Labcorp is trading at $258.04 per share, or 14x forward P/E. Dive into our free research report to see why there are better opportunities than LH.
West Pharmaceutical Services (WST)
Market Cap: $22.75 billion
Founded in 1923 and serving as a critical link in the pharmaceutical supply chain, West Pharmaceutical Services (NYSE: WST) manufactures specialized packaging, containment systems, and delivery devices for injectable drugs and healthcare products.
Why Does WST Worry Us?
- Sales trends were unexciting over the last two years as its 4.9% annual growth was below the typical healthcare company
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 5.8 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
West Pharmaceutical Services’s stock price of $322.04 implies a valuation ratio of 35.8x forward P/E. Check out our free in-depth research report to learn more about why WST doesn’t pass our bar.
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