Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. But speed bumps such as inventory destocking have persisted in the wake of COVID-19, limiting growth. This has capped returns as the industry’s six-month gain of 1.2% has lagged the S&P 500’s 9.8% climb.
While some businesses have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Taking that into account, here are three healthcare stocks we’re swiping left on.
Enovis (ENOV)
Market Cap: $1.33 billion
With a focus on helping patients regain or maintain their natural motion, Enovis (NYSE: ENOV) develops and manufactures medical devices for orthopedic care, from injury prevention and pain management to joint replacement and rehabilitation.
Why Are We Out on ENOV?
- Sales tumbled by 2.3% annually over the last five years, showing market trends are working against it during this cycle
- Push for growth has led to negative returns on capital, signaling value destruction, 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 $23.12 per share, Enovis trades at 6.4x forward P/E. Check out our free in-depth research report to learn more about why ENOV doesn’t pass our bar.
Zimmer Biomet (ZBH)
Market Cap: $15.97 billion
With a history dating back to 1927 and a presence in over 100 countries worldwide, Zimmer Biomet (NYSE: ZBH) designs and manufactures orthopedic products including knee and hip replacements, surgical tools, and robotic technologies for joint reconstruction and spine surgeries.
Why Are We Wary of ZBH?
- Muted 5.6% annual revenue growth over the last five years shows its demand lagged behind its healthcare peers
- Estimated sales growth of 2.4% for the next 12 months implies demand will slow from its two-year trend
- Low returns on capital reflect management’s struggle to allocate funds effectively
Zimmer Biomet’s stock price of $84.47 implies a valuation ratio of 9.9x forward P/E. To fully understand why you should be careful with ZBH, check out our full research report (it’s free).
Illumina (ILMN)
Market Cap: $22.72 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 Are We Hesitant About ILMN?
- 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
- ROIC of 0.7% reflects management’s challenges in identifying attractive investment opportunities
Illumina is trading at $150.10 per share, or 27x forward P/E. If you’re considering ILMN for your portfolio, see our FREE research report to learn more.
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