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3 Stocks That Are Easy to Understand

By Keith Speights, Sean Williams, and Brian Feroldi – Updated Apr 21, 2019 at 10:08PM

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Keep it simple, shareholders, with these three stocks.

Investing can be complicated at times. That's especially the case when you're dealing with stocks of companies that operate in complex industries. But investing doesn't have to be complicated.

We asked three Motley Fool contributors to identify stocks that are easy to understand. They picked food delivery company Grubhub (GRUB), robotic surgical systems maker Intuitive Surgical (ISRG 1.14%), and big pharma company Pfizer (PFE 1.77%). Here's why these three stocks made the keep-it-simple list.

Blue "easy" button on a PC keyboard

Image source: Getty Images.

Hungry for profits

Brian Feroldi (Grubhub): If you're new to investing and are looking for an easy company to analyze, I'd suggest that you get to know the food delivery company Grubhub. The company's business model is dead simple and is very easy for investors to understand.

Grubhub partners with thousands of restaurants and lists their food for sale on its website and mobile app. Customers can pick what they want to eat and place an order. Grubhub then processes the order and collects the payment while the restaurant handles the cooking and delivery. Grubhub takes a commission on each sale.

This is a service in which everybody wins. Restaurants get an incremental source of revenue for a full-price customer that likely wouldn't have dined with them otherwise. The diner gets instant access to thousands of restaurants, and the food is delivered directly to them. Grubhub acts as a neutral third party and simply collects a commission.

This business model has worked like a charm ever since Grubhub was founded. Investors who got in soon after this company's 2014 IPO have more than doubled their money already. What's more, since the top dog in food delivery naturally benefits from double-sided network effects -- restaurants want to list on the site with the most diners and vice versa -- this is Grubhub's game to lose.

The key metrics for investors to watch moving forward are revenue, net income, active diners, and gross food sales. As long as all of these metrics continue to grow at a rapid clip, it means that Grubhub is successfully executing against its long-term objectives. Last quarter, these figures grew by 52%, 75%, 67%, and 40%, respectively, which makes it clear as day that Grubhub is doing exceedingly well.

Grubhub's stock has fallen drastically in the recent market sell-off, and shares are now trading for a reasonable 39 times forward earnings. While that's not "cheap," I think it is a great price for new investors considering opening up a starter position.

Check out the latest Grubhub earnings call transcript.

The kingpin of robotically assisted surgical systems

Sean Williams (Intuitive Surgical): Although medical devices might seem too intimidating or cutting edge (pardon the pun) for new investors or those who don't have a lot of time to devote to research, California-based Intuitive Surgical has a business model that's straightforward and exceptionally profitable.

The Intuitive Surgical business model is simple: It develops state-of-the-art robotic systems (known as the da Vinci system) that assist in soft-tissue surgeries. This is a company with a dominant market share in urology and gynecology surgeries and with plenty of opportunities to expand into thoracic, colorectal, and other general soft-tissue procedures.

Why would a surgeon want to use a sophisticated machine, you ask? The answer is that it can be even more precise than a human. This means less scarring from incisions, faster healing times, and potentially fewer complications. Even though robotically assisted procedures typically cost more, faster healing times can save on back-end expenses.

Intuitive Surgical makes money three ways. It sells its surgical systems to hospitals and universities for between $0.5 million and $2.5 million, provides instruments and tools for each procedure performed, and offers servicing of its da Vinci system. Since these machines are so intricate, they cost a lot to develop, which means Intuitive Surgical doesn't make a lot of money by selling them. However, the tools and instruments that go along with each procedure, along with the service revenue, tend to be very high margin.

The beauty of this business model is that as more da Vinci systems are installed, the more reliant the company becomes on high-margin instruments, tools, and service revenue. In other words, it should be getting more bang for its revenue dollar with each passing year. It also has far more installed machines around the world than do its competitors, leading to an almost impenetrable competitive advantage.

Though its surgical machines may seem daunting, this is an easy-to-understand company primed for a long runway of success.

Check out the latest Intuitive Surgical earnings call transcript.

A 170-year old drugmaker

Keith Speights (Pfizer): Times were a lot simpler back in 1849 when Pfizer was founded. But while the technology for developing drugs has changed dramatically, Pfizer's business model remains straightforward. The big pharma company makes drugs, invests its profits into adding more new drugs to its lineup, and rewards shareholders in the process.

Of course, developing drugs is complicated. The good news is that you don't have to understand how Pfizer does it. All you really need to know is that the company does it pretty well. Pfizer has 10 drugs that likely made at least $1 billion in sales in 2018. (The company hasn't announced its final results for last year yet.)

These drugs and other Pfizer products helped the company generate more than $53 billion in revenue and nearly $24 billion in profit over the last 12 months. Over the last several years, Pfizer has reinvested around 15% of its total revenue into research and development of new products.

The company gave even more money back to shareholders through dividends and share repurchases. Pfizer offers one of the best dividend yields in healthcare and recently increased its dividend payout by nearly 6%.

Make drugs, reinvest in research, and reward shareholders. That's pretty simple. And Pfizer has been doing it for a long time.

Check out the latest Pfizer earnings call transcript.

Brian Feroldi owns shares of Grubhub and Intuitive Surgical. Keith Speights owns shares of Intuitive Surgical and Pfizer. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool has a disclosure policy.

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