Investors flock to healthcare stocks because they believe they are a somewhat safe way to make money. After all, health spending is typically mandatory rather than voluntary, so the sector is probably better at holding up in the face of recession than others. Healthcare also lacks complicating factors such as cyclicality that make timing investments difficult.
But as you’re probably already aware, not all healthcare stocks live up to the ideal of low-risk investments with decent returns. In fact, over the past five years, you would have been better off buying and holding an index fund that tracks the broader market than either of the two stocks we’ll discuss today. Even though these stocks compete in relatively stable fields, and whatever their characteristics — at least until recently, they looked like proven business models.
Here’s why both stocks below are likely to continue underperforming.
1. Walgreens Boots Alliance
Stocks like Walgreens Boots Alliance (NASDAQ:WBA) soared 12.5% on news that it would be closing 1,500 stores, as announced on October 15th along with its fourth-quarter earnings report. It’s a clear sign that it shouldn’t be closed. It does not guarantee the safety of shareholders. Walgreens Pharmacy may appear to be pursuing stable profits based on real and constant demand from the millions of people who need prescriptions. But ultimately, appeasing the market requires more than that.
Walgreens is going through this painful downsizing process in order to return to operating profitability, a key benchmark that it has consistently failed to meet since before 2022. The shrinking of its footprint is occurring even as sales continue to grow. Revenues in 2024 increased by 6.2% to $147.7 billion on a constant currency basis.
That said, its operational inefficiencies are holding back revenue growth and benefiting investors in the form of profits, especially considering that the dividend was cut by almost half earlier this year.
Management expects the company to return to positive earnings per share (EPS) on an adjusted basis in fiscal 2025. At the same time, the company indicated that key headwinds remain, including weak prescription reimbursement from insurance and weak retail sales. Pressure on pharmacy profit margins.
Therefore, you should wait for better results that show Walgreens is showing signs of stabilization before considering buying the stock.
2. CVS Health
CVS Health (NYSE: CVS) is in much better shape than Walgreens at the moment, but it’s not a safe stock for many of the same reasons. The company’s normalized 12-month EPS increased just 7% over the past five years to $5.62. Despite continued investment in the healthcare services sector (including primary care) and the healthcare benefits sector (covering insurance), there are few signs that the situation will improve soon.
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According to management, CVS is currently undergoing a multi-year cost-cutting campaign that is expected to save approximately $2 billion annually. At the same time, the three-year goal of closing 900 unprofitable stores is expected to be achieved by the end of this year. Realizing these savings and closing those stores shouldn’t result in your business losing out on a lot of revenue.
Still, the question for investors looking for safety is what happens next when the low-hanging fruit of cost efficiency wears off and there are virtually no unprofitable stores left. Standing water alone is not enough for the plant to grow.
In that regard, the health services sector has not exactly delivered on its long-term promise to drive sales and profit growth. Second quarter sales were $42.1 billion, down 8.8% from a year earlier.
Management appears to believe that a decline of this magnitude is unlikely to occur again. But like Walgreens, risk-averse investors would be wise to avoid this stock for now.
Don’t miss out on this potentially lucrative second chance
Have you ever felt like you missed out on buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our team of expert analysts will issue a “Double Down” stock recommendation on a company we think is about to crash. If you’re already worried that you’re missing out on an investment opportunity, now is the best time to buy before it’s too late. And the numbers speak for themselves.
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We currently have “double down” alerts on three great companies, and we may not see an opportunity like this again anytime soon.
See 3 “Double Down” stocks »
*Stock Advisor will return as of October 14, 2024
Alex Karkidi has no position in any stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
Two “Safe” Healthcare Stocks Could Be Anything was originally published by The Motley Fool.
