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 9.7% over the past six months, topping the S&P 500 by 1.8 percentage points.
Regardless of these results, investors must exercise caution as many businesses in this space are subject to heavy regulation that can influence their earnings potential. With that said, here is one healthcare stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Healthcare Stocks to Sell:
STERIS (STE)
Market Cap: $20.53 billion
With a mission critical role in preventing healthcare-associated infections, STERIS (NYSE: STE) provides infection prevention products, sterilization services, and medical equipment that help healthcare facilities and life science companies maintain sterile environments.
Why Is STE Not Exciting?
- 7.5% annual revenue growth over the last two years was slower than its healthcare peers
- Adjusted operating margin didn’t move over the last five years, showing it couldn’t increase its efficiency
- Underwhelming 5.3% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $210.59 per share, STERIS trades at 18.9x forward P/E. Dive into our free research report to see why there are better opportunities than STE.
Agilent (A)
Market Cap: $39.47 billion
Originally spun off from Hewlett-Packard in 1999 as its measurement and analytical division, Agilent Technologies (NYSE: A) provides analytical instruments, software, services, and consumables for laboratory workflows in life sciences, diagnostics, and applied chemical markets.
Why Are We Wary of A?
- Sales trends were unexciting over the last five years as its 4.5% annual growth was below the typical healthcare company
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Diminishing returns on capital suggest its earlier profit pools are drying up
Agilent is trading at $139.07 per share, or 21.1x forward P/E. If you’re considering A for your portfolio, see our FREE research report to learn more.
One Healthcare Stock to Watch:
UnitedHealth (UNH)
Market Cap: $384.7 billion
With over 100 million people served across its various businesses and a workforce of more than 400,000, UnitedHealth Group (NYSE: UNH) operates a health insurance business and Optum, a healthcare services division that provides everything from pharmacy benefits to primary care.
Why Do We Like UNH?
- Decent 10.6% annual revenue growth over the last five years beat most of its peers, showing customers find value in its products and services
- Enormous revenue base of $450.1 billion gives it leverage over plan holders and advantageous reimbursement terms with healthcare providers
- Market-beating returns on capital illustrate that management has a knack for investing in profitable ventures
UnitedHealth’s stock price of $423.62 implies a valuation ratio of 20.3x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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