Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. But speed bumps such as inventory destockings have persisted in the wake of COVID-19, limiting growth. This has capped the upside for healthcare stocks lately as the industry’s flat return over the past six months has trailed the S&P 500’s 10.5% gain.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. On that note, here is one healthcare stock boasting a durable advantage and two we’re swiping left on.
Two Healthcare Stocks to Sell:
STAAR Surgical (STAA)
Market Cap: $1.36 billion
With over 2.5 million implants performed worldwide, STAAR Surgical (NASDAQ: STAA) designs and manufactures implantable lenses that correct vision problems without removing the eye's natural lens.
Why Do We Steer Clear of STAA?
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Free cash flow margin dropped by 35.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Waning returns on capital imply its previous profit engines are losing steam
STAAR Surgical is trading at $27.36 per share, or 116x forward P/E. To fully understand why you should be careful with STAA, check out our full research report (it’s free).
The Pennant Group (PNTG)
Market Cap: $829.8 million
Spun off from The Ensign Group in 2019 to focus on non-skilled nursing healthcare services, Pennant Group (NASDAQ: PNTG) operates home health, hospice, and senior living facilities across 13 western and midwestern states, serving patients of all ages including seniors.
Why Does PNTG Fall Short?
- Revenue base of $798.9 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- ROIC of 5.7% reflects management’s challenges in identifying attractive investment opportunities
At $24.01 per share, The Pennant Group trades at 20.4x forward P/E. Check out our free in-depth research report to learn more about why PNTG doesn’t pass our bar.
One Healthcare Stock to Watch:
Tenet Healthcare (THC)
Market Cap: $16.29 billion
With a network spanning nine states and serving primarily urban and suburban communities, Tenet Healthcare (NYSE: THC) operates a nationwide network of hospitals, ambulatory surgery centers, and outpatient facilities providing acute care and specialty healthcare services.
Why Are We Fans of THC?
- Share buybacks catapulted its annual earnings per share growth to 29.1%, which outperformed its revenue gains over the last five years
- ROIC punches in at 21.3%, illustrating management’s expertise in identifying profitable investments, and its returns are climbing as it finds even more attractive growth opportunities
- Returns on capital are growing as management capitalizes on its market opportunities
Tenet Healthcare’s stock price of $185 implies a valuation ratio of 14.2x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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