When looking for stocks to buy and hold for the long haul, investors will want to focus on either mature companies with stable cash flows or emerging companies with solid growth potential. A cash cow can better weather market downturns, often serves an important economic niche, and likely distributes a portion of earnings to shareholders in the form of dividend payments. A less mature growth company is often riskier, but could drive much greater returns.
For example, American Water Works (AWK 0.36%) is a stable, slow-growing water utility that has walloped the total returns of the S&P 500 over the long haul. Meanwhile, NeoGenomics (NEO 0.92%) is a fast-growing genetic testing lab that's finally beginning to churn out profits. Here's why each stock is worth a closer look for investors with a long-term mindset.
Providing clean, running water is a great market niche
Water infrastructure is considered a public good, but the maintenance and upgrades are left to private industry. Strict regulations ensure the incentives of water utilities are aligned with the public interest.
For example, companies such as American Water Works must invest in delivery and treatment infrastructure before applying to regulators for rate increases, which are capped and remain in place for a certain length of time. As a result, water utilities have a path to guaranteed (albeit slow) growth and profits, while ratepayers are protected financially and provided access to functioning water systems (aside from rare, high-profile instances of mismanagement).
American Water Works has thrived thanks in large part to its massive size, which allows it to deploy increasing amounts of capital into infrastructure improvements and earn rate increases across multiple states. Higher earnings then allow the company to make larger investments in a continuous cycle of growth. Case in point: Shares have delivered a 10-year total return of 716%, compared to "only" 283% for the S&P 500.
The water utility has no plans to stop leveraging its financial heft. American Water Works expects to grow adjusted earnings per share (EPS) at a compound annual growth rate (CAGR) of 7% to 10% from 2020 to 2024 (using 2018 as the base year). The business plans to grow capital expenditures by 5% to 7% per year in that span, and continue making acquisitions in a highly fragmented national industry.
There's no shortage of investments to make. American Water Works operates in 16 states and owns 51,000 miles of pipelines, 621 water treatment plants, 130 wastewater facilities, 1,000 wells, and 80 dams. That creates an abundance of opportunities spread across time and geography. In fact, the $24 billion business plans to invest up to $22 billion in regulated infrastructure this decade.
Investors with a long-term mindset should find plenty of attractive features to American Water Works. That includes a dividend that currently yields 1.5% and has grown at a CAGR of 10.4% since 2014. Simply put, this mature business operates in an important industry with solid long-term prospects.
Performing oncology testing for over 2,600 hospitals and cancer centers
Advances in the field of genetic sequencing are creating a wealth of opportunities for improving patient outcomes in oncology. Cancers can be detected earlier, when they're easier to treat, and an individual's cancer can be matched to treatment options with the highest chances of positive outcomes. And researchers can sift through terabytes of biological data collected from thousands of patient samples to discover new drug targets.
But those advances have also created obstacles, such as bottlenecks in diagnostic and data processing, that few hospitals are equipped to handle. Those obstacles have given rise to genetic testing companies such as NeoGenomics, which is one of the only pure-play oncology reference laboratories.
The clinical services segment of NeoGenomics works with over 2,600 hospitals and cancer centers. It has 10 global locations, processes 1 million oncology tests annually, and serves roughly 500,000 patients each year. In the first nine months of 2019, the segment was responsible for 88% of total revenue. It generated sales of $267 million, marking year-over-year growth of 52%.
The company's growth is supported by smoothing over the data processing workflow for smaller hospitals and clinical teams. Clinicians and researchers send in patient samples, choose tests from the company's comprehensive menu, and receive quality data and data interpretation in return. NeoGenomics even offers data consultation services, which could help the business to retain larger hospital systems as customers, especially as they increasingly move diagnostic processing capabilities in-house.
The pharmaceutical services segment is much smaller, comprising the remaining 12% of total revenue, but it provides intriguing growth potential. NeoGenomics helps companies to discover novel biomarkers, develop new diagnostics, and prepare for regulatory filings. The segment generated revenue of only $34 million in the first nine months of 2019, but reported a backlog of $118 million.
The segment should receive a sizable boost in 2020. NeoGenomics acquired the pharma services division of Human Longevity in early January for $37 million. The assets generated $10 million in revenue in 2019.
Investors cannot expect NeoGenomics to maintain its 50% growth rate indefinitely, but the business should continue growing at a healthy clip for the foreseeable future. Considering the proactive approach taken to continually improve data generation and data processing, and the fact that operating income continues to grow, investors with a long-term mindset should give this overlooked genetic testing stock a closer look.