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 23.2% over the past six months, topping the S&P 500 by 11.5 percentage points.
Nevertheless, investors should tread carefully as the sector is heavily regulated, and businesses can be negatively impacted if the rules change. On that note, here is one healthcare stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Healthcare Stocks to Sell:
Thermo Fisher (TMO)
Market Cap: $228.7 billion
With over 14,000 sales personnel and a portfolio spanning more than 2,500 technology manufacturers, Thermo Fisher Scientific (NYSE: TMO) provides scientific equipment, reagents, consumables, software, and laboratory services to pharmaceutical, biotech, academic, and healthcare customers worldwide.
Why Are We Hesitant About TMO?
- 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
- Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 5.1 percentage points
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 1.4% annually while its revenue grew
Thermo Fisher’s stock price of $626.59 implies a valuation ratio of 23.2x forward P/E. To fully understand why you should be careful with TMO, check out our full research report (it’s free).
CVS Health (CVS)
Market Cap: $124.3 billion
With over 9,000 retail pharmacy locations serving as neighborhood health destinations across America, CVS Health (NYSE: CVS) operates retail pharmacies, provides pharmacy benefit management services, and offers health insurance through its Aetna subsidiary.
Why Does CVS Give Us Pause?
- Annual sales growth of 6.9% over the last two years lagged behind its healthcare peers as its large revenue base made it difficult to generate incremental demand
- Estimated sales growth of 1.6% for the next 12 months implies demand will slow from its two-year trend
- Performance over the past five years shows its incremental sales were less profitable, as its 1.1% annual earnings per share growth trailed its revenue gains
At $97.31 per share, CVS Health trades at 11.9x forward P/E. Check out our free in-depth research report to learn more about why CVS doesn’t pass our bar.
One Healthcare Stock to Watch:
Amgen (AMGN)
Market Cap: $240.1 billion
Founded in 1980 during the early days of the biotechnology revolution, Amgen (NASDAQ: AMGN) is a biotechnology company that discovers, develops, and manufactures innovative medicines to treat serious illnesses like cancer, osteoporosis, and autoimmune diseases.
Why Does AMGN Stand Out?
- Revenue base of $38.1 billion gives it economies of scale and some negotiating power
- AMGN is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
- ROIC punches in at 17.3%, illustrating management’s expertise in identifying profitable investments
Amgen is trading at $442.45 per share, or 18.9x forward P/E. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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