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 7.1%. This drawdown is a far cry from the S&P 500’s 4.7% ascent.

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 is one resilient healthcare stock at the top of our wish list and two we’re passing on.

Two Healthcare Stocks to Sell:

Teleflex (TFX)

Market Cap: $5.49 billion

With a portfolio spanning from vascular access catheters to minimally invasive surgical tools, Teleflex (NYSE: TFX) designs, manufactures, and supplies single-use medical devices used in critical care and surgical procedures across hospitals worldwide.

Why Does TFX Fall Short?

1. 2.4% annual revenue growth over the last two years was slower than its healthcare peers
2. Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Teleflex’s stock price of $124.29 implies a valuation ratio of 9.2x forward P/E. To fully understand why you should be careful with TFX, check out our full research report (it’s free).

Organon (OGN)

Market Cap: $2.41 billion

Spun off from Merck in 2021 to create a company dedicated to addressing unmet needs in women's health, Organon (NYSE: OGN) is a global healthcare company focused on improving women's health through prescription therapies, medical devices, biosimilars, and established medicines.

Why Are We Cautious About OGN?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.6% annually over the last five years
2. Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 18.5% annually, worse than its revenue
3. 25.6 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 $9.28 per share, Organon trades at 2.4x forward P/E. If you’re considering OGN for your portfolio, see our FREE research report to learn more.

One Healthcare Stock to Watch:

ResMed (RMD)

Market Cap: $41.88 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 Do We Watch RMD?

1. Business is well-positioned no matter the global macroeconomic backdrop as its constant currency revenue growth averaged 10.3% over the past two years
2. Performance over the past five years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 14.9% outpaced its revenue gains
3. Free cash flow margin expanded by 12.5 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends

ResMed is trading at $283.70 per share, or 27.5x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.

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