From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Players catalyzing medical advancements have benefited from elevated demand, and their momentum is only rising as the industry has posted a 25.2% gain over the past six months, beating the S&P 500 by 16.3 percentage points.
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. Taking that into account, here are three healthcare stocks we would avoid.
Moderna (MRNA)
Market Cap: $87.04 billion
Rising to global prominence during the COVID-19 pandemic with one of the first effective vaccines, Moderna (NASDAQ:MRNA) develops messenger RNA (mRNA) medicines that direct the body's cells to produce proteins with therapeutic or preventive benefits for various diseases.
Why Do We Steer Clear of MRNA?
- Sales tumbled by 20.5% annually over the last five years, showing market trends are working against it during this cycle
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 24.5% annually, worse than its revenue
- 95.9 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
At $215.67 per share, Moderna trades at 46x forward price-to-sales. Dive into our free research report to see why there are better opportunities than MRNA.
Chemed (CHE)
Market Cap: $6.67 billion
With a unique business model combining end-of-life care and household services, Chemed (NYSE:CHE) operates two distinct businesses: VITAS, which provides hospice care for terminally ill patients, and Roto-Rooter, which offers plumbing and water restoration services.
Why Does CHE Give Us Pause?
- 4.1% annual revenue growth over the last five years was slower than its healthcare peers
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 3.9 percentage points
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Chemed’s stock price of $512.08 implies a valuation ratio of 20x forward P/E. Read our free research report to see why you should think twice about including CHE in your portfolio.
10x Genomics (TXG)
Market Cap: $9.10 billion
Founded in 2012 by scientists seeking to overcome limitations in traditional biological research methods, 10x Genomics (NASDAQ:TXG) develops instruments, consumables, and software that enable researchers to analyze biological systems at single-cell resolution and spatial context.
Why Do We Pass on TXG?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.2% annually over the last two years
- Subscale operations are evident in its revenue base of $616.9 million, meaning it has fewer distribution channels than its larger rivals
- Negative returns on capital show management lost money while trying to expand the business
10x Genomics is trading at $69.56 per share, or 14.6x forward price-to-sales. To fully understand why you should be careful with TXG, check out our full research report (it’s free).
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