Bad Medicine: Approach These 3 Healthcare Stocks With Caution

From overvaluation to high debt, are healthcare stocks such as Extendicare Inc. (TSX:EXE) unfit for long-term investors right now?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Healthcare has to be one of the most defensive sectors on the TSX index, with medical stocks theoretically offering a bit of recession-proof backbone to a long-term investor. However, finding a single healthy stock in this space is challenging at the moment, so let’s take a look at a few of the top Canadian healthcare stocks and see what ailments they seem to be suffering from.

Sienna Senior Living (TSX:SIA)

This popular stock is often a top choice in the senior housing services space, representing exposure to the Canadian long-term care (LTC) industry. On a tear since the end of December, Sienna Senior Living is now trading at around twice its book price, and with a P/E ratio that tops 100 times earnings – perfect if you’re looking to cash in, but is it the wrong time to buy?

Despite 48.8% five-year returns that are impressive in their own right, there are higher performing stocks out there, so if this is your base metric, you might want to keep looking; indeed, the average Canadian healthcare returns over the same half-decade were considerably higher at 68.3%.

A high volume of shares were sold by Sienna Senior Living insiders in the last three months; however, newcomers may be enticed by a decent dividend yield of 4.99% coupled with a 23.4% expected annual growth in earnings – an outlook analysis that is generally not as easy to come by this year as it was in 2018.

Extendicare (TSX:EXE)

Extendicare’s share price seems to have plateaued over the last few weeks, leaving the question of whether it’s going to resume its holiday growth curve or revert to a protracted slump. This senior care and services stock is generally underperforming, so let’s see whether there’s any upside or passive income to be squeezed from it.

This fairly obvious TSX index choice is something of a mixed bag at the moment: while a dividend yield of 6.59% is certainly enticing, a P/E of 79.6 times earnings and P/B of 5.1 times book are anything but. As a passive income choice it’s certainly got a lot going for it – its dividends per share have been stable over the last decade, for instance – though for a long-term consideration, its debt level of 420.3% of net worth may put off the risk-averse investor.

Medical Facilities (TSX:DR)

Investment doesn’t get much more defensive that emergency healthcare, and this stock’s sturdy position in the specialty surgical hospital sector makes it a strong choice for a medical asset buyer. Again, passive income is the main draw, and Medical Facilities ups the ante here with a dividend yield of 6.89%.

However, with a negative one-year past earnings growth and low five-year average of 1.6%, there’s not much by way of a track record, here. While a past-year ROE of 26% speaks to the quality of this stock, a high debt 91% of net worth suggests a less than healthy balance sheet, while a P/B of 2.8 times book indicates overvaluation.

The bottom line

While Sienna Senior Living has delivered more than 20% year-on-year earnings growth in the last five years (66.8%), its balance sheet is let down by a comparative debt level of 179.4% of net worth, counting it out for the strictly low-risk investor. This kind of lopsidedness seems symptomatic of healthcare stocks in general this year, indicating an industry that may need to be approached with heightened discernment.

Should you invest $1,000 in Medical Facilities Corporation right now?

Before you buy stock in Medical Facilities Corporation, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Medical Facilities Corporation wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. Extendicare is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Blocks conceptualizing the Registered Retirement Savings Plan
Dividend Stocks

RRSP Investors: 3 Canadian Dividend Stocks to Buy on Dips

These stocks have strong track records of dividend growth and now trade at discounted prices.

Read more »

concept of real estate evaluation
Dividend Stocks

Beyond Real Estate: These TSX Income Generators Could Deliver Superior Passive Income for Canadians

These two TSX dividend stocks could offer Canadian investors a reliable income stream and strong long-term upside, without relying on…

Read more »

Confused person shrugging
Dividend Stocks

Better TSX Dividend Stock to Own: Manulife or Sun Life?

While Sun Life stock has outpaced Manulife in the last two decades, which dividend-paying insurance giant is a good buy…

Read more »

coins jump into piggy bank
Dividend Stocks

How to Use Your TFSA to Earn $1,057/Year in Tax-Free Income

Investing $5,000 in each of these high-yield dividend stocks can help you earn over $1,057 per year in tax-free income.

Read more »

Man in fedora smiles into camera
Dividend Stocks

How I’d Build a $20,000 Retirement Portfolio With These 3 TSX Dividend All-Stars

If you're worried about returns and want to focus on dividends, these dividend stocks are the first to consider.

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

If I Could Only Buy and Hold a Single Canadian Stock, This Would Be It

Here's why this high-quality defensive growth stock is one of the best Canadian companies to buy now and hold for…

Read more »

Concept of multiple streams of income
Dividend Stocks

3 Safe Dividend Stocks for Retirees

These three Canadian stocks are ideal for retirees due to their solid cash flows, consistent dividend growth, and healthy growth…

Read more »

dividends can compound over time
Dividend Stocks

3 Canadian Market Leaders Where I’d Invest $10,000 for Sustained Performance

Market leaders like Alimentation Couche-Tard Inc (TSX:ATD) are worth an investment.

Read more »