Personal health and wellness is one of the many secular tailwinds for healthcare companies. Players catalyzing medical advancements have benefited from elevated demand, and their momentum is only rising as the industry has posted a 22.3% gain over the past six months, beating the S&P 500 by 11.2 percentage points.
Regardless of these results, investors must exercise caution as many businesses in this space are subject to heavy regulation that can influence their earnings potential. With that said, here are three healthcare stocks we’re steering clear of.
Sotera Health Company (SHC)
Market Cap: $5.38 billion
With a critical role in ensuring the safety of millions of patients worldwide, Sotera Health (NASDAQGS:SHC) provides sterilization services, lab testing, and advisory services to ensure medical devices, pharmaceuticals, and food products are safe for use.
Why Are We Hesitant About SHC?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Revenue base of $1.22 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Investment activity picked up over the last five years, pressuring its weak free cash flow margin of 0.8%
At $18.87 per share, Sotera Health Company trades at 18.5x forward P/E. Check out our free in-depth research report to learn more about why SHC doesn’t pass our bar.
Gilead Sciences (GILD)
Market Cap: $165.2 billion
From its groundbreaking work in developing the first single-tablet regimens for HIV treatment, Gilead Sciences (NASDAQ: GILD) develops and markets innovative medicines for life-threatening diseases including HIV, viral hepatitis, COVID-19, and cancer.
Why Are We Wary of GILD?
- Annual sales growth of 2.7% over the last five years lagged behind its healthcare peers as its large revenue base made it difficult to generate incremental demand
- Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 34.2 percentage points
- Earnings per share have contracted by 15.4% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
Gilead Sciences is trading at $133.19 per share, or 14.3x forward P/E. Dive into our free research report to see why there are better opportunities than GILD.
Myriad Genetics (MYGN)
Market Cap: $311.8 million
Founded in 1991 as one of the pioneers in translating genetic discoveries into clinical applications, Myriad Genetics (NASDAQ: MYGN) develops genetic tests that assess disease risk, guide treatment decisions, and provide insights across oncology, women's health, and mental health.
Why Are We Out on MYGN?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Issuance of new shares over the last five years caused its earnings per share to fall by 7.4% annually while its revenue grew
- EBITDA losses may force it to accept punitive lending terms or high-cost debt
Myriad Genetics’s stock price of $3.20 implies a valuation ratio of 0.4x forward price-to-sales. To fully understand why you should be careful with MYGN, check out our full research report (it’s free).
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