From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Players catalyzing medical advancements have benefited from elevated demand, and their momentum is only rising as the industry has posted a 31.4% gain over the past six months, beating the S&P 500 by 21.7 percentage points.

Regardless of these results, investors must exercise caution as many businesses in this space are subject to heavy regulation that can influence their earnings potential. Taking that into account, here are three healthcare stocks we would avoid.

Integra LifeSciences (IART)

Market Cap: $1.05 billion

Founded in 1989 as a pioneer in regenerative medicine technology, Integra LifeSciences (NASDAQ:IART) develops and manufactures medical technologies for neurosurgery, wound care, and surgical reconstruction, including regenerative tissue products and surgical instruments.

Why Are We Out on IART?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 4.6% annually
3. High net-debt-to-EBITDA ratio of 5× could force the company to raise capital on unfavorable terms if market conditions deteriorate

Integra LifeSciences is trading at $13.53 per share, or 5.3x forward P/E. Dive into our free research report to see why there are better opportunities than IART.

AMN Healthcare Services (AMN)

Market Cap: $1.55 billion

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 Are We Wary of 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. Earnings per share have dipped by 7.6% annually over the past five years, which is concerning because stock prices follow EPS over the long term
3. Diminishing returns on capital suggest its earlier profit pools are drying up

At $38.72 per share, AMN Healthcare Services trades at 44.4x forward P/E. If you’re considering AMN for your portfolio, see our FREE research report to learn more.

Jazz Pharmaceuticals (JAZZ)

Market Cap: $13.92 billion

Originally founded in 2003 and now headquartered in Ireland following a 2012 tax inversion merger, Jazz Pharmaceuticals (NASDAQGS:JAZZ) develops and markets medicines for sleep disorders, epilepsy, and cancer, with a focus on treatments for patients with limited therapeutic options.

Why Are We Hesitant About JAZZ?

1. Estimated sales growth of 4.9% for the next 12 months implies demand will slow from its two-year trend
2. Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 2.6 percentage points
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

Jazz Pharmaceuticals’s stock price of $214.48 implies a valuation ratio of 9.6x forward P/E. To fully understand why you should be careful with JAZZ, check out our full research report (it’s free).

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