From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But speed bumps such as inventory destockings have persisted in the wake of COVID-19, and over the past six months, the industry has pulled back by 1.2%. This drawdown is a noticeable divergence from the S&P 500’s 11.3% return.
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.
Bausch + Lomb (BLCO)
Market Cap: $5.16 billion
With a nearly 170-year history dedicated to vision care and eye health innovation, Bausch + Lomb (NYSE: BLCO) develops and manufactures a comprehensive range of eye health products including contact lenses, pharmaceuticals, surgical devices, and consumer eye care solutions.
Why Is BLCO Not Exciting?
- Muted 7.2% annual revenue growth over the last five years shows its demand lagged behind its healthcare peers
- Free cash flow margin dropped by 23.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Bausch + Lomb is trading at $14.61 per share, or 17.3x forward P/E. To fully understand why you should be careful with BLCO, check out our full research report (it’s free).
Mettler-Toledo (MTD)
Market Cap: $26.53 billion
With roots dating back to the precision balance innovations of Swiss engineer Erhard Mettler, Mettler-Toledo (NYSE: MTD) manufactures precision weighing instruments, analytical equipment, and product inspection systems used in laboratories, industrial settings, and food retail.
Why Does MTD Worry Us?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Estimated sales growth of 4.5% for the next 12 months is soft and implies weaker demand
- Inability to adjust its cost structure while its revenue declined over the last two years led to a 1.1 percentage point drop in the company’s adjusted operating margin
At $1,288 per share, Mettler-Toledo trades at 29.2x forward P/E. Read our free research report to see why you should think twice about including MTD in your portfolio.
PacBio (PACB)
Market Cap: $372.5 million
Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ: PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.
Why Do We Steer Clear of PACB?
- Sales trends were unexciting over the last two years as its 3.4% annual growth was below the typical healthcare company
- Free cash flow margin shrank by 28.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
PacBio’s stock price of $1.25 implies a valuation ratio of 2.2x forward price-to-sales. To fully understand why you should be careful with PACB, check out our full research report (it’s free).
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