From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Those leading the charge have not only realized strong financial performance but also propelled the broader industry’s returns as healthcare stocks have gained 2.3% over the past six months. This was a good place to be as the S&P 500 tumbled by 1.8%.
Although these businesses have produced results, only a handful will thrive over the long term as the influx of venture capital has ushered in a new wave of competition. On that note, here is one healthcare stock poised to generate sustainable market-beating returns and two best left ignored.
Two Healthcare Stocks to Sell:
U.S. Physical Therapy (USPH)
Market Cap: $1.16 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 Fall Short?
- Smaller revenue base of $781 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Annual earnings per share growth of 1.9% underperformed its revenue over the last five years, showing its incremental sales were less profitable
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6 percentage points
At $76.73 per share, U.S. Physical Therapy trades at 26x forward P/E. To fully understand why you should be careful with USPH, check out our full research report (it’s free).
GoodRx (GDRX)
Market Cap: $733.1 million
Started in 2011 to tackle the problem of high prescription drug costs in America, GoodRx (NASDAQ: GDRX) operates a digital platform that helps consumers find lower prices on prescription medications through price comparison tools and discount codes.
Why Do We Steer Clear of GDRX?
- Sales trends were unexciting over the last two years as its 2.4% annual growth was below the typical healthcare company
- Revenue base of $796.9 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Negative returns on capital show that some of its growth strategies have backfired
GoodRx is trading at $2.15 per share, or 6.4x forward P/E. Check out our free in-depth research report to learn more about why GDRX doesn’t pass our bar.
One Healthcare Stock to Watch:
AbbVie (ABBV)
Market Cap: $374.3 billion
Born from a 2013 spinoff of Abbott Laboratories' pharmaceutical business, AbbVie (NYSE: ABBV) is a biopharmaceutical company that develops and markets medications for autoimmune diseases, cancer, neurological disorders, and other complex health conditions.
Why Are We Fans of ABBV?
- Dominant market position is represented by its $61.16 billion in revenue, which creates significant barriers to entry in this highly regulated industry
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
- ROIC punches in at 17%, illustrating management’s expertise in identifying profitable investments
AbbVie’s stock price of $211.03 implies a valuation ratio of 14.2x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free.
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