3 Healthcare Stocks We're Skeptical Of

Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. Those leading the charge have not only realized strong financial performance but also propelled the broader industry’s returns as healthcare stocks have gained 11% over the past six months while the S&P 500 was up 6.6%.

Nevertheless, investors should tread carefully as the sector is heavily regulated, and businesses can be negatively impacted if the rules change. Taking that into account, here are three healthcare stocks we’re passing on.

Tandem Diabetes (TNDM)

Market Cap: $1.72 billion

With technology that automatically adjusts insulin delivery based on continuous glucose monitoring data, Tandem Diabetes Care (NASDAQ:TNDM) develops and manufactures automated insulin delivery systems that help people with diabetes manage their blood glucose levels.

Why Do We Avoid TNDM?

1. Incremental sales over the last five years were much less profitable as its earnings per share fell by 18.5% annually while its revenue grew
2. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
3. EBITDA losses may force it to accept punitive lending terms or high-cost debt

At $24.89 per share, Tandem Diabetes trades at 31.8x forward EV-to-EBITDA. If you’re considering TNDM for your portfolio, see our FREE research report to learn more.

Select Medical (SEM)

Market Cap: $1.86 billion

With a nationwide network spanning 46 states and over 2,700 healthcare facilities, Select Medical (NYSE:SEM) operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers across the United States.

Why Does SEM Give Us Pause?

1. Declining admissions over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 9.3% annually
3. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Select Medical is trading at $16.17 per share, or 12.1x forward P/E. Check out our free in-depth research report to learn more about why SEM doesn’t pass our bar.

Repligen (RGEN)

Market Cap: $7.04 billion

With over 13 strategic acquisitions since 2012 to build its comprehensive bioprocessing portfolio, Repligen (NASDAQ:RGEN) develops and manufactures specialized technologies that improve the efficiency and flexibility of biological drug manufacturing processes.

Why Do We Steer Clear of RGEN?

1. Smaller revenue base of $738.3 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
2. Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 18.3 percentage points
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Repligen’s stock price of $124.97 implies a valuation ratio of 65.6x forward P/E. Read our free research report to see why you should think twice about including RGEN in your portfolio.

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