From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Shareholders who bet on the industry have been rewarded lately as healthcare stocks have returned 18.3% over the past six months, topping the S&P 500 by 7.4 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 best left ignored.
Two Healthcare Stocks to Sell:
Acadia Healthcare (ACHC)
Market Cap: $2.86 billion
With a network of over 250 facilities serving patients in 38 states and Puerto Rico, Acadia Healthcare (NASDAQ: ACHC) operates facilities providing mental health and substance use disorder treatment services across the United States.
Why Do We Avoid ACHC?
- Weak admissions over the past two years imply it may need to invest in improvements to get back on track
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 12.4% annually
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Acadia Healthcare’s stock price of $30.73 implies a valuation ratio of 19.4x forward P/E. To fully understand why you should be careful with ACHC, check out our full research report (it’s free).
Amneal (AMRX)
Market Cap: $5.76 billion
Founded in 2002 and growing into one of America's largest generic drug producers, Amneal Pharmaceuticals (NASDAQ: AMRX) develops, manufactures, and distributes generic medicines, specialty branded drugs, biosimilars, and injectable products for the U.S. healthcare market.
Why Does AMRX Worry Us?
- Estimated sales growth of 3.3% for the next 12 months implies demand will slow from its two-year trend
- Annual earnings per share growth of 4.8% underperformed its revenue over the last five years, showing its incremental sales were less profitable
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Amneal is trading at $18.17 per share, or 18.2x forward P/E. If you’re considering AMRX for your portfolio, see our FREE research report to learn more.
One Healthcare Stock to Buy:
Hims & Hers Health (HIMS)
Market Cap: $6.87 billion
Originally launched with a focus on stigmatized conditions like hair loss and sexual health, Hims & Hers Health (NYSE: HIMS) operates a consumer-focused telehealth platform that connects patients with healthcare providers for prescriptions and wellness products.
Why Will HIMS Outperform?
- Average customer growth of 26.1% over the past two years demonstrates success in acquiring new clients that could increase their spending in the future
- Free cash flow margin increased by 16.1 percentage points over the last five years, giving the company more capital to invest or return to shareholders
- Historical investments are beginning to pay off as its returns on capital are growing
At $29.92 per share, Hims & Hers Health trades at 2.3x forward price-to-sales. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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