From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But speed bumps such as inventory destocking have persisted in the wake of COVID-19, limiting growth. This has capped returns as the industry’s six-month gain of 4.1% has lagged the S&P 500’s 10.3% climb.
Investors should tread carefully as the influx of venture capital has also ushered in a new wave of competition. Keeping that in mind, here are three healthcare stocks we’re steering clear of.
Omnicell (OMCL)
Market Cap: $2.03 billion
Driven by the vision of an "Autonomous Pharmacy" with zero medication errors, Omnicell (NASDAQ: OMCL) provides medication management automation and adherence tools that help healthcare systems and pharmacies reduce errors and improve efficiency.
Why Should You Dump OMCL?
- Sales trends were unexciting over the last two years as its 5.4% annual growth was below the typical healthcare company
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 6.8% annually
- ROIC of 0.5% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
Omnicell is trading at $44.88 per share, or 23.1x forward P/E. Dive into our free research report to see why there are better opportunities than OMCL.
The Pennant Group (PNTG)
Market Cap: $1.19 billion
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 Are We Wary of PNTG?
- Modest revenue base of $1.02 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Low free cash flow margin of 1.9% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
The Pennant Group’s stock price of $34.65 implies a valuation ratio of 24.3x forward P/E. Read our free research report to see why you should think twice about including PNTG in your portfolio.
Jazz Pharmaceuticals (JAZZ)
Market Cap: $14.77 billion
Originally founded in 2003 and now headquartered in Ireland following a 2012 tax inversion merger, Jazz Pharmaceuticals (NASDAQGS:JAZZ) develops and markets medicines for sleep disorders, epilepsy, and cancer, with a focus on treatments for patients with limited therapeutic options.
Why Is JAZZ Not Exciting?
- Sales trends were unexciting over the last two years as its 7.5% annual growth was below the typical healthcare company
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 21.5 percentage points
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 4.2% annually
At $235.41 per share, Jazz Pharmaceuticals trades at 3.7x forward price-to-sales. If you’re considering JAZZ for your portfolio, see our FREE research report to learn more.
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