From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But financial performance has lagged recently as players offloaded surplus COVID inventories in 2023 and 2024, a headwind for overall demand. The result? Over the past six months, the industry has tumbled by 6.4%. This performance was disappointing since the S&P 500 held its ground.

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 swiping left on.

Penumbra (PEN)

Market Cap: $10.87 billion

Founded in 2004 to address challenging medical conditions with significant unmet needs, Penumbra (NYSE: PEN) develops and manufactures innovative medical devices for treating vascular diseases and providing immersive healthcare rehabilitation solutions.

Why Does PEN Fall Short?

1. Modest revenue base of $1.24 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
2. Low free cash flow margin of 3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Negative returns on capital show that some of its growth strategies have backfired

Penumbra is trading at $281.56 per share, or 70.3x forward P/E. If you’re considering PEN for your portfolio, see our FREE research report to learn more.

Dentsply Sirona (XRAY)

Market Cap: $3.33 billion

With roots dating back to 1877 when it introduced the first dental electric drill, Dentsply Sirona (NASDAQ: XRAY) manufactures and sells professional dental equipment, technologies, and consumable products used by dentists and specialists worldwide.

Why Do We Think XRAY Will Underperform?

1. Weak constant currency growth over the past two years indicates challenges in maintaining its market share
2. Sales were less profitable over the last five years as its earnings per share fell by 7% annually, worse than its revenue declines
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Dentsply Sirona’s stock price of $16.72 implies a valuation ratio of 8.8x forward P/E. Read our free research report to see why you should think twice about including XRAY in your portfolio.

AMN Healthcare Services (AMN)

Market Cap: $868.7 million

With a network of thousands of healthcare professionals ranging from nurses to physicians to executives, AMN Healthcare (NYSE: AMN) provides healthcare workforce solutions including temporary staffing, permanent placement, and technology platforms for hospitals and healthcare facilities across the United States.

Why Do We Pass on AMN?

1. Declining travelers on assignment over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

At $22.17 per share, AMN Healthcare Services trades at 18.5x forward P/E. Check out our free in-depth research report to learn more about why AMN doesn’t pass our bar.

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