Healthcare stocks have returned 33.8% over the past six months, topping the S&P 500 by 24.7 percentage points. While the sector has rewarded investors, analysts caution that heavy regulation continues to influence earnings potential for many businesses in the space. In a recent assessment, analysts identified two resilient stocks to watch and one that underwhelms.
Charles River Laboratories (NYSE:CRL) is the stock analysts advise steering clear of. The company, which supports pharmaceutical and biotechnology firms with preclinical testing, research models, and manufacturing, has a market cap of $16.21 billion. Named after the Massachusetts river where it was founded in 1947, CRL faces risks stemming from its recent financial performance. Organic sales over the past two years suggest the company may need strategic adjustments or acquisitions to catalyze faster growth.
Over the last five years, incremental sales for CRL were less profitable, as earnings per share remained flat while revenue grew. Additionally, returns on capital have eroded from an already low base, indicating that management's recent investments may be destroying value. The stock trades at $336.66, implying a valuation ratio of 27.9x forward P/E.
In contrast, United Therapeutics (NASDAQ:UTHR) is highlighted as a potential winner. Founded by a mother seeking treatment for her daughter's pulmonary arterial hypertension, UTHR develops and commercializes medications for chronic lung diseases, with a focus on pulmonary hypertension treatments. The company has a market cap of $24.17 billion.
UTHR has delivered solid 14.7% annual revenue growth over the last five years, indicating its offerings solve complex business issues. It operates as a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders. The company demonstrates an industry-leading 29.1% return on capital, with returns growing as it capitalizes on better market opportunities. United Therapeutics trades at $579.55 per share, or 18.9x forward P/E.
The Ensign Group (NASDAQ:ENSG) is the second stock analysts recommend watching. Founded in 1999 and named after a naval term for a flag-bearing ship, ENSG operates skilled nursing facilities, senior living communities, and rehabilitation services across 15 states. The company primarily serves high-acuity patients recovering from various medical conditions and has a market cap of $10.02 billion.
ENSG has posted annual revenue growth of 17.6% over the past two years, which analysts describe as outstanding and reflective of market share gains. Projected revenue growth of 21% for the next 12 months is above its two-year trend, pointing to accelerating demand. Furthermore, earnings growth has outpaced peers over the last five years, with earnings per share compounding at 13.9% annually. The Ensign Group is trading at $174.50 per share, or 21.1x forward P/E.