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 33.2% over the past six months, topping the S&P 500 by 26.1 percentage points.
Although these businesses have produced results, only a handful will thrive over the long term as the influx of venture capital has ushered in a new wave of competition. Taking that into account, here is one healthcare stock poised to generate sustainable market-beating returns and two we would avoid.
Two healthcare stocks to sell:
West Pharmaceutical Services (WST)
Market cap: $28.74 billion
Founded in 1923 and serving as a critical link in the pharmaceutical supply chain, West Pharmaceutical Services (NYSE: WST) manufactures specialized packaging, containment systems, and delivery devices for injectable drugs and healthcare products.
Why Are We Cautious About WST?
- Annual revenue growth of 4.8% over the last five years was below our standards for the healthcare sector
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 4.5 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
West Pharmaceutical Services’s stock price of $412.81 implies a valuation ratio of 41.8x forward P/E. Check out our free in-depth research report to learn more about why WST doesn’t pass our bar.
Zoetis (ZTS)
Market cap: $32.94 billion
Originally spun off from Pfizer in 2013 as the world's largest pure-play animal health company, Zoetis (NYSE: ZTS) discovers, develops, and sells medicines, vaccines, diagnostic products, and services for pets and livestock animals worldwide.
Why Is ZTS Not Exciting?
- Sales trends were unexciting over the last two years as its 2.7% annual growth was below the typical healthcare company
- Sales are projected to tank by 1.2% over the next 12 months as demand evaporates
- ROIC hasn’t moved, making investors question whether its recent investments can increase profitability
Zoetis is trading at $79.63 per share, or 12.8x forward P/E. To fully understand why you should be careful with ZTS, check out our full research report (it’s free).
One healthcare stock to buy:
Humana (HUM)
Market cap: $49.77 billion
With over 80% of its revenue derived from federal government contracts, Humana (NYSE: HUM) provides health insurance plans and healthcare services to approximately 17 million members, with a strong focus on Medicare Advantage plans for seniors.
Why Do We Love HUM?
- Solid 15.1% annual revenue growth over the last two years indicates its offerings solve complex business issues
- Enormous revenue base of $145.8 billion gives it leverage over plan holders and advantageous reimbursement terms with healthcare providers
- ROIC punches in at 32.9%, illustrating management’s expertise in identifying profitable investments
At $411.09 per share, Humana trades at 33.7x forward P/E. Is now a good time to buy? See for yourself in our full research report, it’s free.
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