2 Beaten-Down Stocks to Avoid Right Now

Key Points

• Teladoc faces slow revenue growth (at best), constant net losses, and steep competition.

• Sarepta Therapeutics' most important product, a gene therapy, is under intense scrutiny.

• 10 stocks we like better than Teladoc Health ›

Just because a stock has been battered doesn't make it an automatic buy. That's only the case if it can bounce back, and in some cases, there are few good reasons to believe it can.

Take Teladoc Health (NYSE: TDOC) and Sarepta Therapeutics (NASDAQ: SRPT). These two healthcare companies have lagged the market this year, but even at their current levels, they don't look particularly attractive. Here's why investors should stay away from them.

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1. Teladoc Health

Teladoc, a telemedicine specialist, is facing multiple headwinds. First, the company's top line isn't growing nearly as fast as it once was -- that is, if it is moving in the right direction at all. In the second quarter, revenue declined by 2% year over year to $631.9 million.

The company has had to deal with stiff competition for some of its services, including BetterHelp, its virtual-therapy platform that was once its biggest growth driver.

Second, Teladoc remains unprofitable. The company reported a net loss per share of $0.19 for the second quarter. Although that was significantly better than the loss per share of $4.92 it recorded in the year-ago quarter, that hardly means profitability is around the corner.

Image source: Getty Images.

Last year, Teladoc reported a goodwill impairment charge related to the timing of cash flows for its BetterHelp segment; that explains its steep net loss per share in the second quarter of 2024. Teladoc has encountered such noncash charges several times over the past few years due to acquisitions or other factors, resulting in a fluctuating, but still almost always negative, bottom line.

A significant portion of its expenses is allocated to marketing costs. These efforts are clearly not yielding the kind of results the company would hope for, given its unimpressive revenue growth. Some might point out that Teladoc is still expanding its ecosystem, particularly its core integrated-care unit, whose enrollment increased by 11% year over year to 102.4 million members.

And the company is expanding into other regions, including Canada. Teladoc's international revenue has increased faster than the rest of its business in recent quarters. However, BetterHelp's struggles, persistent net losses, and the potential increase in costs associated with its international efforts make the business' prospects uncertain.

The stock is too risky for most investors to venture into at this time. It's best to stay away, at least until Teladoc can show signs of life.

2. Sarepta Therapeutics

Sarepta Therapeutics has seen its shares decline by 85% this year. The biotech, which focuses on rare diseases, announced that two patients died due to liver toxicity issues while taking its gene therapy Elevidys, for Duchenne muscular dystrophy (DMD), a muscle-wasting disease.

This medicine is central to Sarepta's prospects. Although the drugmaker has other approved medicines for DMD, only Elevidys targeted the underlying causes of the condition. It was first approved in the U.S. in 2023 and already accounts for a significant portion of the company's top line.

In the first quarter, before any of these developments had an effect on the company's results, Sarepta generated $744.9 million in revenue, an increase of 80% compared to the year-ago period. Sales from Elevidys were $375 million (not including royalty revenue), about half of the company's top line.

But in the second quarter, it reported $362.9 million in revenue. Although that was 39% higher than the year-ago period, it was down 51.2% sequentially. Elevidys' sales for the second period were $121.7 million, down 67.5% compared to the first quarter, reflecting lower demand for the medicine.

Sarepta is trying to move past that. After a back-and-forth with the U.S. Food and Drug Administration, the company resumed shipping Elevidys for ambulatory DMD patients, while it works with the agency to find ways to reduce the risks for non-ambulatory patients. Management has also aggressively reduced expenses, partly through layoffs, while refinancing existing debt that was set to mature in 2027.

These moves should give the company more time to figure out a path forward. And in my view, it's worth keeping an eye on its progress. However, there is too much uncertainty that remains for now, especially when we consider that another patient died from liver failure in a phase 1 clinical trial Sarepta was running for a different, investigational therapy for another rare muscle disease, limb-girdle muscular dystrophy.

These issues are far too severe for the stock to be attractive at its current price, even after an 85% year-to-date decline.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Teladoc Health. The Motley Fool has a disclosure policy.