Personal health and wellness is one of the many secular tailwinds for healthcare companies. Shareholders who bet on the industry have been rewarded lately as healthcare stocks have returned 18.6% over the past six months, topping the S&P 500 by 10.2 percentage points.
Nevertheless, investors should tread carefully as the sector is heavily regulated, and businesses can be negatively impacted if the rules change. On that note, here are three healthcare stocks best left ignored.
UFP Technologies (UFPT)
Market Cap: $1.98 billion
With expertise dating back to 1963 in specialized materials and precision manufacturing, UFP Technologies (NASDAQ: UFPT) designs and manufactures custom solutions for medical devices, sterile packaging, and other highly engineered products for healthcare and industrial applications.
Why Is UFPT Not Exciting?
- Smaller revenue base of $598 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Estimated sales growth of 4.6% for the next 12 months implies demand will slow from its two-year trend
At $256.67 per share, UFP Technologies trades at 25.3x forward P/E. Check out our free in-depth research report to learn more about why UFPT doesn’t pass our bar.
Chemed (CHE)
Market Cap: $6.40 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
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 4.3 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
Chemed’s stock price of $456.97 implies a valuation ratio of 17.7x forward P/E. If you’re considering CHE for your portfolio, see our FREE research report to learn more.
AdaptHealth (AHCO)
Market Cap: $1.39 billion
With a network of approximately 680 locations serving patients across all 50 states, AdaptHealth (NASDAQ: AHCO) provides home medical equipment, supplies, and related services to patients with chronic conditions like sleep apnea, diabetes, and respiratory disorders.
Why Are We Wary of AHCO?
- 2.1% annual revenue growth over the last two years was slower than its healthcare peers
- Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 4.7 percentage points
- ROIC of 1.3% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up
AdaptHealth is trading at $10.49 per share, or 11.7x forward P/E. Dive into our free research report to see why there are better opportunities than AHCO.
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