Personal health and wellness is one of the many secular tailwinds for healthcare companies. Players catalyzing medical advancements have benefited from elevated demand, which has supported the industry’s returns lately - over the past six months, healthcare stocks have gained 6.4%, nearly mirroring the S&P 500.
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. With that said, here is one healthcare stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Healthcare Stocks to Sell:
RadNet (RDNT)
Market Cap: $4.58 billion
With over 350 imaging facilities across seven states and a growing artificial intelligence division, RadNet (NASDAQ: RDNT) operates a network of outpatient diagnostic imaging centers across the United States, offering services like MRI, CT scans, PET scans, mammography, and X-rays.
Why Do We Think Twice About RDNT?
- Smaller revenue base of $2.14 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 10.6 percentage points
- ROIC of 5.7% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
At $58.34 per share, RadNet trades at 79.7x forward P/E. Check out our free in-depth research report to learn more about why RDNT doesn’t pass our bar.
Amphastar Pharmaceuticals (AMPH)
Market Cap: $905.2 million
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 Wary of AMPH?
- Sales trends were unexciting over the last two years as its 3% annual growth was below the typical healthcare company
- Subscale operations are evident in its revenue base of $720.5 million, meaning it has fewer distribution channels than its larger rivals
- Expenses have increased as a percentage of revenue over the last two years as its adjusted operating margin fell by 10.7 percentage points
Amphastar Pharmaceuticals’s stock price of $20.19 implies a valuation ratio of 1.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than AMPH.
One Healthcare Stock to Watch:
Waters Corporation (WAT)
Market Cap: $35.32 billion
Founded in 1958 and pioneering innovations in laboratory analysis for over six decades, Waters (NYSE: WAT) develops and manufactures analytical instruments, software, and consumables for liquid chromatography, mass spectrometry, and thermal analysis used in scientific research and quality testing.
Why Are We Positive on WAT?
- Offerings and unique value proposition resonate with customers, as seen in its above-market 13.9% annual sales growth over the last two years
- Demand for the next 12 months is expected to accelerate above its two-year trend as Wall Street forecasts robust revenue growth of 80.1%
- Market-beating returns on capital illustrate that management has a knack for investing in profitable ventures
Waters Corporation is trading at $359.40 per share, or 24.2x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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