From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. 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 13.2%. This performance was significantly worse than the S&P 500’s 2.4% decline.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here are two healthcare stocks we think can generate sustainable market-beating returns and one we’re passing on.
Market Cap: $6.66 billion
Originally founded in 2003 and now headquartered in Ireland following a 2012 tax inversion merger, Jazz Pharmaceuticals (NASDAQGS:JAZZ) develops and markets medicines for sleep disorders, epilepsy, and cancer, with a focus on treatments for patients with limited therapeutic options.
Why Does JAZZ Worry Us?
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Annual revenue growth of 4.3% over the last two years was below our standards for the healthcare sector
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Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 6.7 percentage points
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Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging
At $108.25 per share, Jazz Pharmaceuticals trades at 4.6x forward P/E. Read our free research report to see why you should think twice about including JAZZ in your portfolio, it’s free.
Market Cap: $35.87 billion
Founded in 1989 to address the then-underdiagnosed condition of sleep apnea, ResMed (NYSE:RMD) develops cloud-connected medical devices and software solutions that treat sleep apnea, COPD, and other respiratory disorders for home and clinical use.
Why Are We Fans of RMD?
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Business is well-positioned no matter the global macroeconomic backdrop as its constant currency revenue growth averaged 12% over the past two years
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Performance over the past five years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 15.7% outpaced its revenue gains
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Free cash flow margin increased by 7.1 percentage points over the last five years, giving the company more capital to invest or return to shareholders
ResMed is trading at $244.79 per share, or 24.1x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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