Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. Players catalyzing medical advancements have benefited from elevated demand, and their momentum is only rising as the industry has posted a 31.4% gain over the past six months, beating the S&P 500 by 26.9 percentage points.
Regardless of these results, investors must exercise caution as many businesses in this space are subject to heavy regulation that can influence their earnings potential. Keeping that in mind, here is one healthcare stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two healthcare stocks to sell:
Labcorp (LH)
Market cap: $29.5 billion
With over 600 million tests performed annually and involvement in 90% of FDA-approved drugs in 2023, Labcorp (NYSE: LH) provides laboratory testing services and drug development solutions to doctors, hospitals, pharmaceutical companies, and patients worldwide.
Why Does LH Worry Us?
- Sales tumbled by 2.5% annually over the last five years, showing market trends are working against it during this cycle
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Sales were less profitable over the last five years as its earnings per share fell by 10.9% annually, worse than its revenue declines
Labcorp is trading at $362.79 per share, or 19.1x forward P/E. If you’re considering LH for your portfolio, see our FREE research report to learn more.
Guardant Health (GH)
Market cap: $20.59 billion
Pioneering the field of "liquid biopsy" with technology that can identify cancer-specific genetic mutations from a simple blood draw, Guardant Health (NASDAQ: GH) develops blood tests that detect and monitor cancer by analyzing tumor DNA in the bloodstream, helping doctors make treatment decisions without invasive biopsies.
Why Do We Think Twice About GH?
- Subscale operations are evident in its revenue base of $1.28 billion, meaning it has fewer distribution channels than its larger rivals (but more room for growth)
- Negative free cash flow raises questions about the return timeline for its investments
- Negative EBITDA restricts its access to capital and increases the probability of shareholder dilution if things turn unexpectedly
At $137.26 per share, Guardant Health trades at 13.4x forward price-to-sales. To fully understand why you should be careful with GH, check out our full research report (it’s free).
One healthcare stock to watch:
Incyte (INCY)
Market cap: $24.05 billion
Founded in 1991 and evolving from a genomics research firm to a commercial-stage drug developer, Incyte (NASDAQ: INCY) is a biopharmaceutical company that discovers, develops, and commercializes proprietary therapeutics for cancer and inflammatory diseases.
Why Could INCY Be a Winner?
- Impressive 21.4% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Adjusted operating profits and efficiency rose over the last two years as it benefited from some fixed cost leverage
- Stellar returns on capital showcase management’s ability to surface highly profitable business ventures
Incyte’s stock price of $117.99 implies a valuation ratio of 15.6x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
Stocks we like even more
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