Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. Those leading the charge have realized strong financial performance, and over the past six months, the industry’s 10% return has closely followed 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 are three healthcare stocks we’re steering clear of.
Tandem Diabetes (TNDM)
Market Cap: $1.16 billion
With technology that automatically adjusts insulin delivery based on continuous glucose monitoring data, Tandem Diabetes Care (NASDAQ: TNDM) develops and manufactures automated insulin delivery systems that help people with diabetes manage their blood glucose levels.
Why Do We Think TNDM Will Underperform?
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 19.1% annually while its revenue grew
- Negative returns on capital show management lost money while trying to expand the business, and its falling returns suggest its earlier profit pools are drying up
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $16.94 per share, Tandem Diabetes trades at 19.7x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than TNDM.
Haemonetics (HAE)
Market Cap: $3.55 billion
With roots dating back to 1971 and a mission to improve blood-related healthcare, Haemonetics (NYSE: HAE) provides specialized medical devices and software for blood collection, processing, and management across plasma centers, blood banks, and hospitals.
Why Do We Think Twice About HAE?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Modest revenue base of $1.33 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
Haemonetics is trading at $78.01 per share, or 15x forward P/E. If you’re considering HAE for your portfolio, see our FREE research report to learn more.
Illumina (ILMN)
Market Cap: $28.88 billion
Pioneering the ability to read the human genome at unprecedented speed and affordability, Illumina (NASDAQ: ILMN) develops and sells advanced DNA sequencing and microarray technologies that allow researchers and clinicians to analyze genetic variations and functions.
Why Does ILMN Worry Us?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Underwhelming 0.7% return on capital reflects management’s difficulties in finding profitable growth opportunities
Illumina’s stock price of $190.60 implies a valuation ratio of 35.8x forward P/E. Read our free research report to see why you should think twice about including ILMN in your portfolio.
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