Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. But financial performance has lagged recently as players offloaded surplus COVID inventories in 2023 and 2024, a headwind for overall demand. The result? Over the past six months, the industry’s 1.2% return has trailed the S&P 500 by 8.6 percentage points.
Investors should tread carefully as the influx of venture capital has also ushered in a new wave of competition. With that said, here are three healthcare stocks we’re steering clear of.
Artivion (AORT)
Market Cap: $1.10 billion
Formerly known as CryoLife until its 2022 rebranding, Artivion (NYSE: AORT) develops and manufactures medical devices and preserves human tissues used in cardiac and vascular surgical procedures for patients with aortic disease.
Why Are We Cautious About AORT?
- Modest revenue base of $458.7 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Poor free cash flow margin of -0.7% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- ROIC of 2.7% reflects management’s challenges in identifying attractive investment opportunities
At $23.06 per share, Artivion trades at 43.5x forward P/E. Dive into our free research report to see why there are better opportunities than AORT.
Encompass Health (EHC)
Market Cap: $10.35 billion
With a network of 161 specialized facilities across 37 states and Puerto Rico, Encompass Health (NYSE: EHC) operates inpatient rehabilitation hospitals that help patients recover from strokes, hip fractures, and other debilitating conditions.
Why Does EHC Fall Short?
- 6.5% annual revenue growth over the last five years was slower than its healthcare peers
- Weak comparable store sales trends over the past two years suggest there may be few opportunities in its core markets to open new facilities
Encompass Health is trading at $104.33 per share, or 17.2x forward P/E. Read our free research report to see why you should think twice about including EHC in your portfolio.
Elanco (ELAN)
Market Cap: $11.83 billion
Originally established as a division of pharmaceutical giant Eli Lilly before becoming independent in 2018, Elanco Animal Health (NYSE: ELAN) develops and sells medications, vaccines, and other health products for pets and farm animals across more than 90 countries.
Why Does ELAN Worry Us?
- Annual revenue growth of 4.9% over the last five years was below our standards for the healthcare sector
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 2.9 percentage points
- Push for growth has led to negative returns on capital, signaling value destruction
Elanco’s stock price of $23.10 implies a valuation ratio of 21.4x forward P/E. To fully understand why you should be careful with ELAN, check out our full research report (it’s free).
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