Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. 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 6.4%. This drawdown was disappointing since the S&P 500 stood firm.
A cautious approach is imperative when dabbling in these businesses as regulation is another unpredictable element that can affect their earnings potential. On that note, here are three healthcare stocks we’re swiping left on.
NeoGenomics (NEO)
Market Cap: $1.04 billion
Operating a network of CAP-accredited and CLIA-certified laboratories across the United States and United Kingdom, NeoGenomics (NASDAQ: NEO) provides specialized cancer diagnostic testing services, including genetic analysis, molecular testing, and pathology consultation for oncologists and healthcare providers.
Why Should You Dump NEO?
- Earnings per share fell by 12% annually over the last five years while its revenue grew, partly because it diluted shareholders
- Negative returns on capital show that some of its growth strategies have backfired, and its decreasing returns suggest its historical profit centers are aging
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
NeoGenomics is trading at $8 per share, or 36x forward P/E. Check out our free in-depth research report to learn more about why NEO doesn’t pass our bar.
Privia Health (PRVA)
Market Cap: $3.05 billion
Operating in 13 states and the District of Columbia with over 4,300 providers serving more than 4.8 million patients, Privia Health (NASDAQ: PRVA) is a technology-driven company that helps physicians optimize their practices, improve patient experiences, and transition to value-based care models.
Why Does PRVA Fall Short?
- Revenue base of $1.80 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Low free cash flow margin of 4.6% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Push for growth has led to negative returns on capital, signaling value destruction
At $25 per share, Privia Health trades at 29.3x forward P/E. Read our free research report to see why you should think twice about including PRVA in your portfolio.
Guardant Health (GH)
Market Cap: $5.04 billion
Pioneering the field of "liquid biopsy" with technology that can identify cancer-specific genetic mutations from a simple blood draw, Guardant Health (NASDAQ: GH) develops blood tests that detect and monitor cancer by analyzing tumor DNA in the bloodstream, helping doctors make treatment decisions without invasive biopsies.
Why Do We Think Twice About GH?
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 23.7% annually
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Guardant Health’s stock price of $40.26 implies a valuation ratio of 5.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than GH.
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