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 14.6% over the past six months, topping the S&P 500 by 1.5 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 are three healthcare stocks best left ignored.
Select Medical (SEM)
Market Cap: $1.94 billion
With a nationwide network spanning 46 states and over 2,700 healthcare facilities, Select Medical (NYSE: SEM) operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers across the United States.
Why Should You Dump SEM?
- Flat admissions over the past two years imply it may need to invest in improvements to get back on track
- Sales over the last five years were less profitable as its earnings per share fell by 11.7% annually while its revenue was flat
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Select Medical is trading at $15.66 per share, or 12.7x forward P/E. Dive into our free research report to see why there are better opportunities than SEM.
Organon (OGN)
Market Cap: $1.83 billion
Spun off from Merck in 2021 to create a company dedicated to addressing unmet needs in women's health, Organon (NYSE: OGN) is a global healthcare company focused on improving women's health through prescription therapies, medical devices, biosimilars, and established medicines.
Why Do We Think Twice About OGN?
- Sales tumbled by 1.7% annually over the last five years, showing market trends are working against its favor during this cycle
- Sales were less profitable over the last five years as its earnings per share fell by 17.6% annually, worse than its revenue declines
- Free cash flow margin dropped by 24.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $7.09 per share, Organon trades at 1.9x forward P/E. Check out our free in-depth research report to learn more about why OGN doesn’t pass our bar.
Amphastar Pharmaceuticals (AMPH)
Market Cap: $1.21 billion
Founded in 1996 and known for its expertise in complex drug formulations, Amphastar Pharmaceuticals (NASDAQ: AMPH) develops and manufactures technically challenging injectable and inhalation medications, including both generic and proprietary pharmaceutical products.
Why Are We Cautious About AMPH?
- Subscale operations are evident in its revenue base of $723.3 million, meaning it has fewer distribution channels than its larger rivals
- Day-to-day expenses have swelled relative to revenue over the last two years as its adjusted operating margin fell by 4.3 percentage points
Amphastar Pharmaceuticals’s stock price of $26.11 implies a valuation ratio of 7.3x forward P/E. If you’re considering AMPH for your portfolio, see our FREE research report to learn more.
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