The healthcare industry has seen unprecedented capital inflows and investor interest over the past year, as evidenced by the Health Care Select Sector SPDR ETF’s (XLV) 20.9% returns over this period. In addition, the emergence of a new coronavirus variant and the growing demand for the diagnosis and treatment of other serious diseases are incentivizing companies to create integrated and comprehensive medical equipment, virtual consultations, and therapies.

The sector has enormous potential to grow next year thanks to technological advancements and the growing need for improved healthcare products and facilities from an aging population. The global healthcare market is expected to reach $11.9 trillion by 2022.

However, not all companies have been able to capitalize on the industry’s favorable growth prospects. Morgan Stanley recently downgraded Oak Street Health Inc. (OSH) and Bright Health Group Inc. (BHG) because of their poor fundamentals and their inability to outperform their peers. So, these stocks are best avoided now.

Click here to checkout our Healthcare Sector Report for 2021

Oak Street Health Inc. (OSH)

Chicago’s OSH, with its subsidiaries, provides healthcare services to patients in the United States. The company offers primary care clinics for Medicare patients. It operated 79 centers as of December 31, 2020. Morgan Stanley has downgraded the stock to 'Equal-Weight’ from ‘Overweight.’

On November 8, Oak Street revealed that the United States Department of Justice (DOJ) is investigating whether the company violated the False Claims Act. Specifically, Oak Street disclosed in a Form 10-Q that on November 1, 2021, it received a civil investigative demand from the DOJ requesting documents and information related to the company's provision of free transportation to federal healthcare beneficiaries and its relationships with third-party marketing agents.

OSH's total operating expenses increased 82.2% year-over-year to $498 million in the third quarter, ended September 30, 2021. Its operating loss grew 97.3% from its year-ago value to $109.3 million. And its  net loss surged 69.2% from the prior-year quarter to $109.3 million, while its loss per share increased 226.7% year-over-year to $0.49 over this period.

The company's EPS is expected to decline 13.8% next quarter and 220% in the current year. The stock has declined 47.5% in price over the past year and 33.8% over the past three months.

OSH's POWR ratings are consistent with this bleak outlook. The stock has an overall F rating, which translates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

OSH has been graded an F grade for Value and a D for Stability and Growth. Within the C-rated Medical – Hospitals industry, it is ranked last of 14 stocks.

To see additional POWR Ratings for Sentiment, Quality, and Momentum for OSH, click here.

Bright Health Group Inc. (BHG)

BHG in Minneapolis, Minn., is an integrated care delivery company that provides and finances health insurance policies. NeueHealth and Bright HealthCare are the company’s two operational segments. In addition, it manages and is affiliated with 28 risk-bearing primary care clinics. The stock was recently downgraded to 'Underweight' from ‘Equal-Weight’ by Morgan Stanley.

Last month, Bronstein, Gewirtz & Grossman, LLC commenced investigating claims on behalf of BHG shareholders. The company reported disappointing third-quarter earnings on November 11, which it blamed on rising medical expenditures. The company's stock declined 25% on this news. The investigation concerns whether the company and certain officials or directors violated federal securities laws. This could negatively impact the stock’s price performance in the near term.

For the third quarter, ended September 30, 2021, BHG’s operating expenses increased 234.2% year-over-year to $1.37 billion. Its operating loss grew 400% from its year-ago value to $296.28 million. And its  net loss grew 407.4% from the prior-year quarter to $300.64 million, while its loss per share came in at $0.48.

BHG’s EPS is estimated to decline at the rate of 52.8% over the next five years. The stock has declined 59.9% in price over the past three months and 12.9% over the past month.

BHG’s weak fundamentals are reflected in its POWR ratings. The stock has a D grade for Sentiment and a C for Growth and Momentum. In the B-rated Medical – Health Insurance industry, it is ranked #8 of the 12 stocks.

In addition to the POWR Ratings grades I have just highlighted, you can see the BHG rating for Stability, Value, and Quality.

Click here to checkout our Healthcare Sector Report for 2021

OSH shares were unchanged in premarket trading Tuesday. Year-to-date, OSH has declined -45.45%, versus a 23.94% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

More...