Personal health and wellness is one of the many secular tailwinds for healthcare companies. Despite the rosy long-term prospects, short-term headwinds such as COVID inventory destocking have caused the industry to lag recently - over the past six months, the collective 8.4% gain for healthcare stocks has fallen short of the S&P 500’s 22.7% rise.

A cautious approach is imperative when dabbling in these businesses as regulation is another unpredictable element that can affect their earnings potential. Taking that into account, here are three healthcare stocks we’re steering clear of.

West Pharmaceutical Services (WST)

Market Cap: $18.82 billion

Founded in 1923 and serving as a critical link in the pharmaceutical supply chain, West Pharmaceutical Services (NYSE: WST) manufactures specialized packaging, containment systems, and delivery devices for injectable drugs and healthcare products.

Why Does WST Give Us Pause?

1. Muted 1.6% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
2. Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 3.9 percentage points
3. Diminishing returns on capital suggest its earlier profit pools are drying up

At $261 per share, West Pharmaceutical Services trades at 37.3x forward P/E. Read our free research report to see why you should think twice about including WST in your portfolio.

Azenta (AZTA)

Market Cap: $1.37 billion

Serving as the guardian of some of medicine's most valuable materials, Azenta (NASDAQ: AZTA) provides biological sample management, storage, and genomic services that help pharmaceutical and biotechnology companies preserve and analyze critical research materials.

Why Do We Pass on AZTA?

1. Sales tumbled by 7.2% annually over the last five years, showing market trends are working against its favor during this cycle
2. Sales were less profitable over the last five years as its earnings per share fell by 18.7% annually, worse than its revenue declines
3. Free cash flow margin dropped by 22.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Azenta’s stock price of $29.31 implies a valuation ratio of 39.9x forward P/E. To fully understand why you should be careful with AZTA, check out our full research report (it’s free for active Edge members).

Royalty Pharma (RPRX)

Market Cap: $15.57 billion

Pioneering a unique business model in the pharmaceutical industry since 1996, Royalty Pharma (NASDAQ: RPRX) acquires rights to receive portions of sales from successful biopharmaceutical products, providing funding to drug developers without conducting research itself.

Why Is RPRX Not Exciting?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.2% annually over the last two years
2. Subscale operations are evident in its revenue base of $2.31 billion, meaning it has fewer distribution channels than its larger rivals

Royalty Pharma is trading at $36.35 per share, or 7.3x forward P/E. Dive into our free research report to see why there are better opportunities than RPRX.

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