As some of the greatest investing minds will tell you, buying and holding high-quality companies over the long term is going to give you the best chance of generating a healthy return on your investment. This has been a modus operandi for Warren Buffett, and it can work for patient investors, too.
According to an analysis conducted by J.P. Morgan Asset Management, buying and holding the S&P 500 index between Jan. 1, 1995, and Dec. 31, 2014, would have netted a return of 555%, or a healthy 9.9% per year. Mind you, this return was achieved despite both the dot-com bubble bursting and the Great Recession. If you missed just the 10 best trading days of this over 5,000-day period, your return was more than halved, and if you missed a little more than 30 of the best trading days, you'd have lost money.
For some investors, this is all the evidence they need to park their money in low-cost index funds over the long run. However, simply matching the performance of the market isn't good enough for certain investors (including yours truly). They want to beat the market.
How does a 153,500% return over 33 years sound?
Over the past couple of decades, a number of stocks have absolutely crushed the broader market, many of which are tech-based. Technology giant Apple, software kingpin Microsoft, and e-commerce behemoth Amazon.com have returned a respective 25,500%, 71,600%, and 63,800%, respectively, when rounded to the nearest 100% since their inception. This means an initial $1,000 investment would have yielded over $700,000 in the case of Microsoft.
But another non-tech-based company has essentially gained as much as all three of these household names combined since it debuted. With a gain of almost 153,500% since September 1984, inclusive of splits, biotech blue-chip Amgen (AMGN -0.48%) would have turned a $1,000 investment in to more than $1.53 million as of today.
How on earth are these returns possible? Let's try to summarize in a few points why Amgen is such a great company.
A vast product portfolio
The easiest answer as to why Amgen has been so successful is the company's product portfolio. Since the late 1980s through today, innovation has driven Amgen's results. In the late '80s through mid-'90s, Amgen used the discovery of Epogen, Neulasta, Aranesp, and Neupogen to drive its results. Even today, Neulasta, a white blood cell-enhancing medicines for those undergoing cancer treatment, is its best-selling drug with $1.21 billion in sales during the first quarter.
However, Amgen's product portfolio has grown considerably more diverse over time. Within the past two years, it's expanded into a completely new indication and cardiovascular medicines, and it has an even keener focus on cancer than in years past. Examples include multiple myeloma drug Kyprolis, which has a shot at generating $800 million in annual sales in 2017, as well as Repatha, an injectable LDL cholesterol-lowering drug that could transform how high-risk patients fight high cholesterol levels.
A healthy pipeline
On top of having a diversified product portfolio, Amgen's strength in recent years has been a result of it advancing a number of late-stage products (many of which have been approved by the Food and Drug Administration). It's brought around a half-dozen new therapies to market since Dec. 2014 and currently has more than 30 ongoing clinical trials. Some of these offer label expansion opportunities for existing medicines, while others are completely novel therapies.
Beyond just its traditional drug development pipeline, Amgen is working to develop a small army of biosimilar therapies. Biosimilars are copycat versions of biologic drugs that are priced at a discount to brand-name therapies. Included in its biosimilar pipeline is a drug that could give Humira, the current best-selling drug in the world, a run for its money.
Though Amgen has done an excellent job of developing drugs internally and expanding the indications of owned drugs, acquisitions have played a critical role throughout its history.
For instance, Amgen acquired Immunex in May 2009 for what seemed like a hefty price of $16 billion. However, that $16 billion would prove to be something of a steal with Amgen getting the rights to anti-inflammatory drug Enbrel. Last year, Enbrel generated $6 billion in sales for the company, with much of its growth in recent years a result of Amgen's exceptional pricing power.
More recently, Amgen acquired Onyx Pharmaceuticals for $10.4 billion in order to get its hands on Kyprolis and Onyx's other developing cancer therapeutics. Kyprolis is in a very competitive cancer space, but it's nonetheless been growing by a double-digit percentage since it was acquired.
Shareholder returns have helped a lot
Of course, we can't forget to tip our caps to Amgen's management team for its capital return policy. Amgen began paying a dividend to investors in 2011 (dividends from biotech stocks were somewhat unheard of prior to Amgen declaring a dividend six years ago). Over the past six years, this payout has more than quadrupled to $1.15 each quarter from $0.28.
Furthermore, Amgen was no stranger to using share repurchases to buoy its share price during the 2000s, which is when its drug innovation slowed a bit. Having fewer shares outstanding can help boost earnings per share and make a company appear more attractive to investors.
Amgen's probably not done yet
Best of all, Amgen's run may not be anywhere near done. A lot is going to depend on how successful it is in building its cardiovascular portfolio and in expanding the uses of its approved cancer therapeutics.
Right now, Amgen is valued at less than 13 times Wall Street's estimated 2017 EPS of $12.46, and the company is on track to possibly generate more than $14 per share in full-year EPS by the end of the decade. Given its ability to trim costs if necessary and its ample cash flow to snap up attractive acquisitions, it's not inconceivable that Amgen's stock could double within the next decade.