From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But financial performance has lagged recently as players offloaded surplus COVID inventories in 2023 and 2024, a headwind for overall demand. The result? Over the past six months, the industry’s 4.8% return has trailed the S&P 500 by 3.1 percentage points.
A cautious approach is imperative when dabbling in these businesses as regulation is another unpredictable element that can affect their earnings potential. With that said, here are three healthcare stocks we’re steering clear of.
STERIS (STE)
Market Cap: $21.03 billion
With a mission critical role in preventing healthcare-associated infections, STERIS (NYSE: STE) provides infection prevention products, sterilization services, and medical equipment that help healthcare facilities and life science companies maintain sterile environments.
Why Is STE Not Exciting?
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
STERIS’s stock price of $214.46 implies a valuation ratio of 19.7x forward P/E. Check out our free in-depth research report to learn more about why STE doesn’t pass our bar.
Surgery Partners (SGRY)
Market Cap: $1.89 billion
With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ: SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.
Why Does SGRY Fall Short?
- Weak unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Estimated sales growth of 3.3% for the next 12 months implies demand will slow from its two-year trend
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $14.76 per share, Surgery Partners trades at 29.8x forward P/E. Dive into our free research report to see why there are better opportunities than SGRY.
Option Care Health (OPCH)
Market Cap: $3.21 billion
With a nationwide network of 177 locations serving 43 states and a team of over 4,500 clinicians, Option Care Health (NASDAQ: OPCH) is the largest independent provider of home and alternate site infusion services, delivering medications and clinical support to patients across the United States.
Why Are We Wary of OPCH?
- Estimated sales growth of 2.5% for the next 12 months implies demand will slow from its two-year trend
- Free cash flow margin dropped by 1.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Option Care Health is trading at $20.39 per share, or 10.8x forward P/E. If you’re considering OPCH for your portfolio, see our FREE research report to learn more.
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