2 Beaten-Down Stocks to Avoid Right Now

Buying a stock that has significantly lagged broader equities is only a good idea when there are solid reasons to expect it will bounce back and perform better over the long run. But sometimes that simply isn’t the case, and it’s best to avoid beaten-down companies with dim prospects rather than hoping for a hypothetical turnaround. That brings us to Teladoc Health (NYSE:TDOC) and Recursion Pharmaceuticals (NASDAQ:RXRX). These two healthcare companies have lost significant market value in recent years, but they still aren't worth buying on the dip.

Image source: The Motley Fool.

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

1. Teladoc Health

Teladoc, a telemedicine specialist, has been struggling since its pandemic highs. The company has faced significant competition in recent years, resulting in subpar financial results, particularly in its BetterHelp virtual therapy service, which was once its biggest growth driver. There were signs that Teladoc may have been bouncing back earlier this year as the company was making progress in expanding health insurance coverage for BetterHelp, which it thought would boost demand and revenue.

However, Teladoc's second-quarter financial results dealt another blow to the bulls' hopes. Teladoc's revenue declined by 4% year over year to $606.9 million. Its loss per share of $0.21 was slightly worse than the $0.19 loss per share reported in the year-ago period. BetterHelp's revenue dropped 12% year over year, and the service's paying users dropped by 11% compared to the year-ago period. Several other platforms have copied BetterHelp's format and offer slightly differentiated services, including hybrid virtual and in-person care (BetterHelp is only virtual).

It's going to be challenging for Teladoc to build a sustainable competitive advantage that will support consistent revenue growth over the long run, even as it continues to ramp up its insurance coverage, which some of its competitors also offer. True, Teladoc's international revenue continues to grow at a decent clip.

It jumped 7% year over year in the second quarter. But there are significant risks associated with Teladoc's international strategy, beyond competition alone. Teladoc could run into regulatory issues because different countries have varying rules and guidelines governing consultations, prescriptions, and other services it offers through its platform. The bottom line is that the company's outlook remains dim at best. The stock has lost 95% of its value in the past five years. It doesn't look likely to bounce back soon.

2. Recursion Pharmaceuticals

Recursion Pharmaceuticals is a biotech company that uses artificial intelligence (AI) to accelerate drug development. This is an increasingly popular approach in the industry, and it's not hard to understand why. Despite technological progress, the process of developing drugs has become longer and more expensive over the past few decades. Drugmakers are betting that AI can help change that.

For some companies, this is a project they hope will help improve their businesses and lead to productivity and margin gains, as they already have large lineups of approved products that generate consistent revenue and earnings. That's the case with Eli Lilly (NYSE:LLY), Novo Nordisk (NYSE:NVO), and Bristol Myers Squibb (NYSE:BMY), all three of which have taken important steps to incorporate AI into their drug development activities.

However, AI is the core of Recursion Pharmaceuticals' approach. The company uses an AI-powered operating system (OS) that tests investigational compounds and sends the most promising to clinical trials. The problem is that Recursion Pharmaceuticals' success has been limited. Although it has several attractive candidates, so do plenty of other similarly sized biotechs that don't rely on AI nearly as much.

But Recursion has no approved products and none even in phase 3 studies. Most clinical-stage biotechs are fairly risky, and Recursion's AI-powered approach hardly changes that, given it has yet to demonstrate that its strategy can deliver the results it expects. Recursion Pharmaceuticals may well prove the skeptics wrong and show that its AI-powered OS is as powerful as it claims.

But the stock has dropped 21% over the past year for a good reason, and it doesn't look attractive right now. Perhaps that will change as Recursion makes solid clinical and regulatory progress, but until then, it's probably best for most investors to stay on the sidelines.

Prosper Junior Bakiny has positions in Eli Lilly, Novo Nordisk, and Recursion Pharmaceuticals. The Motley Fool has positions in and recommends Bristol Myers Squibb, Eli Lilly, Novo Nordisk, and Teladoc Health. The Motley Fool has a disclosure policy.