From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Despite the rosy long-term prospects, short-term headwinds such as COVID inventory destocking have harmed the industry’s returns - over the past six months, healthcare stocks have collectively shed 11.7%. This drawdown was worse than the S&P 500’s 5.2% decline.

Investors should tread carefully as the influx of venture capital has also ushered in a new wave of competition. Keeping that in mind, here are three healthcare stocks that may face trouble.

Select Medical (SEM)

Market Cap: $2.24 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 Are We Hesitant About SEM?

1. Declining admissions over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
2. Estimated sales decline of 17.4% for the next 12 months implies a challenging demand environment
3. 11.5 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

At $17.45 per share, Select Medical trades at 15.1x forward price-to-earnings. Check out our free in-depth research report to learn more about why SEM doesn’t pass our bar.

Corcept (CORT)

Market Cap: $7.57 billion

Focusing on the powerful stress hormone that affects everything from metabolism to immune function, Corcept Therapeutics (NASDAQ:CORT) develops and markets medications that modulate cortisol to treat endocrine disorders, cancer, and neurological diseases.

Why Does CORT Fall Short?

1. Revenue base of $675 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
2. Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 15.9 percentage points
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 13.6 percentage points

Corcept is trading at $71.50 per share, or 33.4x forward price-to-earnings. To fully understand why you should be careful with CORT, check out our full research report (it’s free).

Collegium Pharmaceutical (COLL)

Market Cap: $860.8 million

Pioneering abuse-deterrent technology in a field plagued by addiction concerns, Collegium Pharmaceutical (NASDAQ:COLL) develops and markets specialty medications for treating moderate to severe pain, including abuse-deterrent opioid formulations.

Why Are We Wary of COLL?

1. Subscale operations are evident in its revenue base of $631.4 million, meaning it has fewer distribution channels than its larger rivals
2. Waning returns on capital imply its previous profit engines are losing steam

Collegium Pharmaceutical’s stock price of $26.79 implies a valuation ratio of 4.2x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than COLL.

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