Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. Shareholders who bet on the industry have been rewarded lately as healthcare stocks have returned 11.5% over the past six months, topping the S&P 500 by 4.3 percentage points.
Nevertheless, investors should tread carefully as the sector is heavily regulated, and businesses can be negatively impacted if the rules change. With that said, here is one healthcare stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two Healthcare Stocks to Sell:
Biogen (BIIB)
Market Cap: $29.52 billion
Founded in 1978 and pioneering treatments for some of medicine's most complex challenges, Biogen (NASDAQ: BIIB) develops and markets therapies for neurological conditions, including multiple sclerosis, Alzheimer's disease, spinal muscular atrophy, and rare diseases.
Why Does BIIB Give Us Pause?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.6% annually over the last five years
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Biogen is trading at $198.91 per share, or 14.8x forward P/E. Dive into our free research report to see why there are better opportunities than BIIB.
UFP Technologies (UFPT)
Market Cap: $1.85 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?
- Modest revenue base of $608.9 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Adjusted operating margin was unchanged over the last two years, suggesting it failed to gain leverage on its fixed costs
At $250.16 per share, UFP Technologies trades at 24x forward P/E. Check out our free in-depth research report to learn more about why UFPT doesn’t pass our bar.
One Healthcare Stock to Watch:
Pfizer (PFE)
Market Cap: $149.2 billion
With roots dating back to 1849 when two German immigrants opened a fine chemicals business in Brooklyn, Pfizer (NYSE: PFE) is a global biopharmaceutical company that discovers, develops, manufactures, and sells medicines and vaccines for a wide range of diseases and conditions.
Why Are We Fans of PFE?
- Unparalleled scale of $63.32 billion in revenue gives it negotiating leverage and staying power in an industry with high barriers to entry
- Adjusted operating profits and efficiency rose over the last two years as it benefited from some fixed cost leverage
- ROIC punches in at 18.1%, illustrating management’s expertise in identifying profitable investments
Pfizer’s stock price of $24.23 implies a valuation ratio of 8.5x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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