Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. Shareholders who bet on the industry have been rewarded lately as healthcare stocks have returned 16.6% over the past six months, topping the S&P 500 by 9.6 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 passing on.
Zimmer Biomet (ZBH)
Market Cap: $18.79 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 Are We Hesitant About ZBH?
- Muted 5.6% annual revenue growth over the last five years shows its demand lagged behind its healthcare peers
- Estimated sales growth of 2.5% for the next 12 months implies demand will slow from its two-year trend
- Underwhelming 4.2% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $96.38 per share, Zimmer Biomet trades at 11.3x forward P/E. Read our free research report to see why you should think twice about including ZBH in your portfolio.
The Ensign Group (ENSG)
Market Cap: $10.51 billion
Founded in 1999 and named after a naval term for a flag-bearing ship, The Ensign Group (NASDAQ: ENSG) operates skilled nursing facilities, senior living communities, and rehabilitation services across 15 states, primarily serving high-acuity patients recovering from various medical conditions.
Why Do We Think Twice About ENSG?
- Declining unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Free cash flow margin has stayed in place over the last five years
- Falling returns on capital show it’s struggled to find investments that are as profitable as past ventures
The Ensign Group’s stock price of $181.93 implies a valuation ratio of 22.4x forward P/E. If you’re considering ENSG for your portfolio, see our FREE research report to learn more.
U.S. Physical Therapy (USPH)
Market Cap: $1.22 billion
With a nationwide footprint spanning 671 clinics across 42 states, U.S. Physical Therapy (NYSE: USPH) operates a network of outpatient physical therapy clinics and provides industrial injury prevention services to employers across the United States.
Why Does USPH Give Us Pause?
- Revenue base of $795.5 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
- Waning returns on capital imply its previous profit engines are losing steam
U.S. Physical Therapy is trading at $79.90 per share, or 26x forward P/E. Dive into our free research report to see why there are better opportunities than USPH.
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