Facebook (META 5.37%) has been one of the great investment successes of this past decade. The company's social media platform has attracted billions in advertiser spending that has propelled it to become one of the most profitable companies out there. With Congress taking a deeper look at the company's business and the recent revelations about users' data privacy (or lack thereof), though, there are likely some investors out there looking to put money elsewhere.
Though Facebook's performance over the past several years will be incredibly hard to replicate, we asked three of our contributors to sift through financial and business models to come up with three stocks that have a shot at meeting (or beating) Facebook's returns. Here's why they picked Vertex Pharmaceuticals (VRTX 2.69%), Cintas (CTAS 2.87%), and Cognex (CGNX 2.02%).
Could beat Facebook? This stock already has
Keith Speights (Vertex Pharmaceuticals): Baseball legend Dizzy Dean once said, "It's not bragging if you can do it." One company that doesn't have to brag that it can beat Facebook's returns is Vertex Pharmaceuticals. The biotech stock nearly doubled Facebook's return last year and is performing significantly better than the social media giant so far in 2018, too.
Vertex currently enjoys a monopoly in treating cystic fibrosis (CF). Its drugs Kalydeco, Orkambi, and Symdeko correct malfunctions in the CFTR gene, which causes CF. Many CF patients have gene mutations that aren't addressed by these three drugs, though. However, Vertex thinks it will have effective treatments for roughly 90% of all CF patients within the next few years.
The biotech plans to achieve this goal through triple-drug combinations. Vertex already has a couple of late-stage studies of one triple-drug combo under way and plans to start a late-stage study of another combo in the next few months. AbbVie and Galapagos are also developing a triple-drug combo to treat CF, but Vertex should have a significant first-mover advantage.
At a healthcare conference last month, Vertex CEO Jeff Leiden pointed out the company has a "problem": It's accumulating cash very rapidly. Vertex intends to address this "problem" by investing in innovation, both internally and through business development deals. The biotech is using its money to develop treatments for 10 other indications. Only one or two of those pipeline programs need to succeed for Vertex to continue beating Facebook's growth.
Boring business can produce Facebook-type returns, too
Tyler Crowe (Cintas): Based on the statistics mentioned above, it would seem nearly impossible for any company to keep pace with Facebook. Shockingly, one company that has kept pace is on the complete opposite end of the business spectrum: uniform rental and facility services company Cintas.
It seems bizarre to think that such a business could produce the kind of stock price returns reserved for Sillicon Valley tech giants. Here's the crucial thing, though. Even though Cintas will never post gaudy revenue growth numbers, it is a high-margin, recurring revenue businesses. That in and of itself has led to impressive earnings growth over time. Unlike Facebook, which can plow billions into new developments, the industry in which Cintas operates is a mature one, so there is a limit to how much it can invest and expect a certain rate of return. With few other options for its cash, Cintas' management has for years elected to manufacture per-share returns with rising dividends and stock buybacks that have outpaced Facebook.
Here's how this works: Over the past decade, Cintas has grown net income by 120%. That's good, but when you combine it with Cintas' share buybacks that have reduced its share count, its earnings-per-share jumped 210% over that same time frame. Sprinkle in a dividend that has grown 13% annually, and you get a stock posting returns better than Facebook.
Cintas is a boring, reliable business that's been around for a long time and has generated great returns for its investors. I can't imagine an investor who wouldn't be attracted to this kind of stock.
Supercharged for the future
Neha Chamaria (Cognex): Facebook stock has more than quadrupled since its initial public offering in 2012. During the same period, shares of Cognex -- a manufacturer of machine vision software and systems -- have grown almost sixfold.
Wait, what exactly is machine vision, you may ask. In its simplistic form, machine vision systems capture digital images that can be processed by computers to facilitate quick decision making. So for example, such a system could inspect thousands of machine parts per minute on a production line to detect and help eliminate defects in the least possible time and at the lowest cost. As you might have already guessed, Cognex's business has a lot to do with automation and robotics, and that's where the stock's potential lies.
During its last quarter, Cognex's sales jumped 39% year over year, but a net loss hit the stock. Blame it on a one-time charge under the new U.S. tax legislation -- otherwise, Cognex's net income shot up 46% year over year. 2017 was a record year for the company.
Management is increasingly bullish about growth, projecting sales from areas like 3D products and logistics to grow 50% annually in the near future. Meanwhile, markets like automotive and consumer electronics continue to grow at a strong clip as more and more companies are automating their processes. If you believe as I do that the artificial intelligence revolution is just getting started, don't be surprised if Cognex shares zoom past Facebook in the coming years.