3 Healthcare Stocks That Give Us Pause

Healthcare Stocks to Approach with Caution

Healthcare companies, whether they’re developing new drugs or advancing telemedicine, are largely focused on improving patient care. Investors in this sector have enjoyed solid gains recently, with healthcare stocks rising 4.1% over the past half-year—closely matching the S&P 500’s performance.

However, the healthcare industry faces strict regulations, and any changes in policy can significantly impact company performance. With that in mind, here are three healthcare stocks we’re currently avoiding.

STERIS (STE)

Market Cap: $21.78 billion

STERIS (NYSE:STE) plays a vital role in infection control, supplying sterilization products, services, and medical equipment to help healthcare providers and life sciences organizations maintain clean environments.

Concerns About STE

• A modest 5% return on capital suggests the company has struggled to identify lucrative growth opportunities.

STERIS shares are priced at $222.13, equating to a forward P/E of 21.

Zimmer Biomet (ZBH)

Market Cap: $17.94 billion

Zimmer Biomet (NYSE:ZBH), established in 1927 and operating in over 100 countries, manufactures orthopedic solutions such as joint replacements, surgical instruments, and robotic systems for spine and joint procedures.

Why We’re Hesitant on ZBH

• Revenue has grown just 5.3% annually over the past five years, trailing the broader healthcare sector.
• Projected sales growth of 3.8% for the coming year indicates a slowdown compared to recent trends.
• Returns on capital remain below industry averages, signaling challenges in finding attractive investments.

Zimmer Biomet trades at $91.97 per share, with a forward P/E of 11.1.

LifeStance Health Group (LFST)

Market Cap: $2.62 billion

LifeStance Health (NASDAQ:LFST) operates a network of more than 6,600 licensed mental health professionals, serving over 880,000 patients each year with psychiatric assessments, psychological testing, and therapy services across 33 states.

Reasons for Concern with LFST

• With annual revenue of $1.42 billion, the company’s smaller scale means fewer distribution channels compared to larger competitors.
• A weak free cash flow margin of 0.5% over the past five years restricts its ability to reinvest, repurchase shares, or pay dividends.
• Negative returns on capital suggest that some growth strategies have not delivered as intended.

LifeStance Health Group is valued at $6.74 per share, translating to a forward P/E of 23.3.

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