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 46.7% gain over the past six months, beating the S&P 500 by 25.6 percentage points.
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 are three healthcare stocks we’re passing on.
Pediatrix Medical Group (MD)
Market Cap: $2.07 billion
With a network of approximately 2,620 affiliated physicians caring for some of the most vulnerable patients, Pediatrix Medical Group (NYSE: MD) provides specialized physician services focused on neonatal, maternal-fetal, pediatric cardiology and other pediatric subspecialty care across 37 states.
Why Are We Wary of MD?
- Sales tumbled by 1.3% annually over the last two years, showing market trends are working against it during this cycle
- Revenue base of $1.95 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Estimated sales growth of 1.5% for the next 12 months is soft and implies weaker demand
Pediatrix Medical Group’s stock price of $26.05 implies a valuation ratio of 10.9x forward P/E. To fully understand why you should be careful with MD, check out our full research report (it’s free).
Fortrea (FTRE)
Market Cap: $1.88 billion
Spun off from Labcorp in 2023 to focus exclusively on clinical research services, Fortrea (NASDAQ: FTRE) is a contract research organization that helps pharmaceutical, biotech, and medical device companies develop and bring their products to market through clinical trials and support services.
Why Do We Think FTRE Will Underperform?
- Sales tumbled by 3% annually over the last five years, showing market trends are working against it during this cycle
- Negative returns on capital show that some of its growth strategies have backfired, and its decreasing returns suggest its historical profit centers are aging
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $19.74 per share, Fortrea trades at 21.4x forward P/E. Check out our free in-depth research report to learn more about why FTRE doesn’t pass our bar.
Collegium Pharmaceutical (COLL)
Market Cap: $723.7 million
Pioneering abuse-deterrent technology in a field plagued by addiction concerns, Collegium Pharmaceutical (NASDAQ: COLL) develops and markets specialty medications for treating moderate to severe pain, including abuse-deterrent opioid formulations.
Why Does COLL Fall Short?
- Subscale operations are evident in its revenue base of $808.2 million, meaning it has fewer distribution channels than its larger rivals
- Estimated sales growth of 3.9% for the next 12 months implies demand will slow from its two-year trend
- Day-to-day expenses have swelled relative to revenue over the last two years as its adjusted operating margin fell by 7.6 percentage points
Collegium Pharmaceutical is trading at $22.21 per share, or 3.2x forward P/E. If you’re considering COLL for your portfolio, see our FREE research report to learn more.
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