From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Shareholders who bet on the industry have been rewarded lately as healthcare stocks have returned 38.9% over the past six months, topping the S&P 500 by 20.9 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 would avoid.
Option Care Health (OPCH)
Market Cap: $3.58 billion
With a nationwide network of 177 locations serving 43 states and a team of over 4,500 clinicians, Option Care Health (NASDAQ: OPCH) is the largest independent provider of home and alternate site infusion services, delivering medications and clinical support to patients across the United States.
Why Are We Wary of OPCH?
- Estimated sales growth of 4.3% for the next 12 months implies demand will slow from its two-year trend
- Free cash flow margin was stuck in limbo over the last five years
- Returns on capital haven’t budged, indicating management couldn’t drive additional value creation
At $23.91 per share, Option Care Health trades at 12.1x forward P/E. Read our free research report to see why you should think twice about including OPCH in your portfolio.
Illumina (ILMN)
Market Cap: $37.37 billion
Pioneering the ability to read the human genome at unprecedented speed and affordability, Illumina (NASDAQ: ILMN) develops and sells advanced DNA sequencing and microarray technologies that allow researchers and clinicians to analyze genetic variations and functions.
Why Does ILMN Give Us Pause?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 3% annually
- Push for growth has led to negative returns on capital, signaling value destruction
Illumina is trading at $248.83 per share, or 41.9x forward P/E. To fully understand why you should be careful with ILMN, check out our full research report (it’s free).
Merck (MRK)
Market Cap: $372.3 billion
With roots dating back to 1891 and a portfolio that includes the blockbuster cancer immunotherapy Keytruda, Merck (NYSE: MRK) develops and sells prescription medicines, vaccines, and animal health products across oncology, infectious diseases, cardiovascular, and other therapeutic areas.
Why Is MRK Not Exciting?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 19.9 percentage points
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 11.1% annually while its revenue grew
Merck’s stock price of $150.94 implies a valuation ratio of 17.4x forward P/E. Dive into our free research report to see why there are better opportunities than MRK.
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