Other Voices: Time To 'Ring The Register' On 3 Healthcare Stocks
By Eddy Elfenbein
The stock market has had an excellent year for 2019, and one sector that’s been unusually hot recently has been healthcare. Over the last two months, the healthcare stocks in the S&P 500, as a whole, have nearly doubled the return of the rest of the index.
That’s impressive, and while many healthcare stocks are deserving of this rally, not all of them are. This is especially true as we head into an election year. The election is still eleven months away, but the candidates have very different ideas for how our healthcare system should work. Naturally, that has an important impact on which stocks will do well, and which stocks could be left behind.
Investing in healthcare is a tricky business, and a lot of new investors can find themselves making costly mistakes. First, I need to explain a few important characteristics of investing in healthcare. There are few better businesses to have than a thriving healthcare company. For one, you can get enormous indirect support from the government. Healthcare firms almost have a legal license to jack up prices each year. Just ask anyone who’s been to the pharmacy lately.
Another key aspect of healthcare is the stability of the business. Spending on healthcare isn’t greatly impacted by the heath of the economy. Not in the way, say, the housing sector is. The stock market loves stability, and it will reward companies that can deliver predictable profits each year.
One dangerous area in healthcare is biotech investing. While there are some worthy biotech firms out there, many are not. In fact, I don’t think most listed biotech stocks should be publicly traded. The companies raise tons of money from gullible investors before they even have products on the market. From what I can see, the only thing they make is loads of press releases promising investors they’re on the cusp of some great medical breakthrough. Yeah, right.
Many of these biotechs are little more than lottery tickets. Sure, you might get the one that pays off. But the odds are, you won’t.
I want to highlight three healthcare stocks that I currently have rated as Strong Sells. Always bear in mind that there’s a difference between a good company and a good stock. If you own any of these three, you may want to consider selling as soon as you can. If you had been thinking of buying any of them, you might want to consider against it.
Steer Clear of These Three Healthcare Stocks
Let’s start with Intuitive Surgical (ISRG). I want to be clear that I’m a fan of this company. In fact, a big fan. ISRG is helping to revolutionize surgery. Its da Vinci Surgical System transforms the surgeon’s natural hand movements outside the body into corresponding micro-movements inside the patient’s body. Importantly, this makes hospital stays shorter and therefore, less costly.
The shares got flattened in April after it missed earnings by nine cents per share ($2.61 versus an estimate of $2.70). The stock plunged over 6% in one day. The shares kept falling, and by the time of the June low, ISRG had shed 20%.
Remarkably, the shares have rebounded and now trade at more than 40 times next year’s earnings. Sorry, but that’s just too much. We’ve already seen what can happen if ISRG misses earnings by a little. What would happen if they missed by a lot? I love the technology but not the price. Sell ISRG.
Next up is Edwards Life Sciences (EW). The company is probably best known for its heart valves. That’s a very good business to be in, and shares of EW have rallied nicely. In the last three years, the S&P 500 is up 40%, but EW is up to 160%.
In October, EW crushed earnings again. For Q3, the company made $1.41 per share. That beat Wall Street’s consensus by 19 cents per share. Traders loved that news, and it sent the shares into low-Earth orbit. Wall Street now expects 2020 earnings of $6.17 per share. That’s enough to give Edwards a forward price/earnings ratio of 38. That’s simply not sustainable. EW is not worth chasing.
My numbers say that Edwards deserves a nice premium to the market, but the current share price is way above that. For now, Edwards Life Sciences is a sell.
Lastly, we have Align Technology (ALGN). If you’re not familiar with Align, this is a very cool company. They make Invisalign clear braces.
There’s a big market for Align and business has been quite good, but I’ll caution you that this stock can be a rollercoaster. Late last year, shares of ALGN shed 50% in a few weeks.
Lately, the shares have been red hot again, which makes me nervous. Align gained nearly 40% in October. Earnings were outstanding, but I’m concerned that Align doesn’t seem to have the pricing power of its main rivals. For example, SmileDirectClub (SDC) is shelling out tons of money on advertising. They’re willing to lose money for now, and that may start to squeeze Align.
Based on the latest numbers, Align Technology is going for 42 times next year’s earnings. That’s way too much. However, if you’re patient, you may get a chance to buy Align for a much lower price sometime in 2020. For now, Align Technology is a sell.
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