Personal health and wellness is one of the many secular tailwinds for healthcare companies. Shareholders who bet on the industry have been rewarded lately as healthcare stocks have returned 13.3% over the past six months, topping the S&P 500 by 2.5 percentage points.
Nevertheless, investors should tread carefully as the sector is heavily regulated, and businesses can be negatively impacted if the rules change. 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:
Omnicell (OMCL)
Market Cap: $2.09 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 Are We Out on OMCL?
- Annual revenue growth of 5.4% over the last two years was below our standards for the healthcare sector
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 6.8% annually
- Underwhelming 0.5% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
Omnicell is trading at $45.39 per share, or 25.2x forward P/E. If you’re considering OMCL for your portfolio, see our FREE research report to learn more.
Surgery Partners (SGRY)
Market Cap: $2.07 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 Worry Us?
- Disappointing unit sales over the past two years imply it may need to invest in improvements to get back on track
- Estimated sales growth of 3.2% for the next 12 months implies demand will slow from its two-year trend
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $16 per share, Surgery Partners trades at 34.1x forward P/E. Read our free research report to see why you should think twice about including SGRY in your portfolio.
One Healthcare Stock to Buy:
Insulet (PODD)
Market Cap: $11.36 billion
Revolutionizing diabetes care with its tubeless "Pod" technology, Insulet (NASDAQ: PODD) develops and manufactures innovative insulin delivery systems for people with diabetes, primarily through its Omnipod product line.
Why Do We Love PODD?
- Steady constant currency growth over the past two years shows the company can pursue its global ambitions, even in uncertain economic times
- Free cash flow margin grew by 25.8 percentage points over the last five years, giving the company more chips to play with
- Returns on capital are growing as management capitalizes on its market opportunities
Insulet’s stock price of $164.11 implies a valuation ratio of 24.6x 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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