Source: shutterstock.com/Leonid Sorokin
Healthcare stocks are generally thought of as safe or even recession-proof investments. This is because the underlying companies provide essential products and services that are required no matter what the broader economy is doing. While they may not offer the most exciting returns, they are usually considered to be solid long-term performers. That said, there are a few healthcare stocks to dump that we will look at today.
From an investment perspective, some potential red flags that could signal its time to sell healthcare stocks are class-action lawsuits and falling sales. Ongoing litigation can create an overhang on a company’s shares for months or even years, while competition from generics or new drugs can seriously dent a firm’s revenue.
Below are three healthcare stocks to sell now that are facing precisely these issues.
Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance (NASDAQ:WBA) is racking up Opioid settlements with state and local governments totaling billions of dollars.
While the company admits no guilt, last month it agreed to pay $500 million to New Mexico and finalized a settlement with the state of California for $5.7 billion. This followed an agreement in May to pay $230 million to the city of San Francisco and $683 million to Florida a year before that. And in late 2022, Walgreens reached an agreement with a coalition of 17 state attorneys general to pay out $5.7 billion over 15 years.
The hits are likely to keep coming and could saddle Walgreens with a huge amount of debt, forcing the company to sell more shares, unload profitable assets or take other actions that could be dilutive to shareholders.
Meanwhile, in line with my previous predictions, Walgreens reported disappointing fiscal third-quarter results on June 28. While revenue rose 8.6% year over year, earnings missed estimates. And management sharply lowered their full-year earnings guidance, citing weakening consumer spending and lower demand for Covid-19 vaccines and testing. I also see competition from Amazon (NASDAQ:AMZN) playing a role.
The weak outlook led Deutsche Bank to cut its rating on WBA stock to “hold” and lower its price target to $34 from $46.
Johnson & Jonson (JNJ)
Speaking of paying out billions of dollars in settlements, Johnson & Johnson (NYSE:JNJ) in April proposed paying at least $8.9 billion to settle thousands of lawsuits alleging the company’s talc-containing powders caused cancer.
However, that plan may be in jeopardy. For the second time, a court has rejected the company’s efforts to have its LTL Management subsidiary, which was created to handle the talc litigation, file for bankruptcy protection.
Although the company has said it will appeal the latest ruling, a Bank of America analyst warned that Johnson & Johnson will likely have to fight individual lawsuits, which could prove much more costly. And, according to a Morgan Stanley analyst, “the talc litigation remains an overhang on the stock,”
JNJ’s forward price-earnings ratio of 15.8 is far too high given the huge litigation overhang.
In a previous column, I noted that AbbVie (NYSE:ABBV) was struggling with the loss of exclusivity on its best-selling biologic treatment, Humira, with U.S. sales declining 26% year over year in the first quarter.
While the company’s recently released second-quarter results came in better than expected, Humira revenue continued to decline, falling by 26% in the U.S. and 25% globally. Overall revenue declined as well, falling nearly 5% to $13.9 billion despite beating estimates. Moreover, AbbVie posted weaker-than-expected sales of its newer psoriasis drug Skyrizi and autoimmune disorder treatment Rinvoq.
It’s also worth noting that while Botox sales for both cosmetic and therapeutic use beat estimates, there’s a new product that could be coming for Botox’s lunch. Revance Therapeutics’ (NASDAQ:RVNC) DAXXIFY was recently approved for the treatment of wrinkles and has been shown to work faster and last longer than Botox.
With competition heating up on multiple fronts, put ABBV on your list of healthcare stocks to dump.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.