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Forget Penny Stocks! Buy These High-Quality Stocks Instead

By David Jagielski - Mar 4, 2021 at 7:35AM

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Both of these giant stocks have outperformed the market over the past year by a mile.

Penny stocks are attractive to some investors because their low prices don't have to increase by much for you to get a great return. Buy a stock at $1, and for your investment to double, it only needs to get to $2. However, it is just as easy for it to go in the other direction, and a 50 cent drop would have you lose half of your investment.

Rather than going on these roller coaster rides, you are better off sticking with established, quality businesses that can generate strong returns for your portfolio over many years. Both Thermo Fisher Scientific (TMO -0.38%) and Microsoft (MSFT 0.15%) are examples of investments you won't need to worry about. Investors can rest easy knowing these stalwarts will only continue to rise in value.

Investor checking stocks on his phone.

Image source: Getty Images.

1. Thermo Fisher

Thermo Fisher makes for a solid healthcare investment because it provides the industry with a variety of products and services. From laboratory equipment to testing kits to ultra-low temperature freezers, its broad offerings make its business incredibly diverse. That can make it easier for a company to deliver strong results over the years. 

That diversification is exactly what Thermo Fisher has been doing, and it's been paying off. Thermo Fisher has sported profit margins of 10% or more in each of the past five years. Even amid the coronavirus pandemic in 2020, it didn't only generate strong double-digit net margins, but they were the highest in the recent five-year stretch, coming in at 20%.

On Feb. 1, the company released its fourth quarter and year-end results for the period ending Dec. 31, 2020. In the fourth quarter, sales of $10.6 billion grew at an impressive 54% year over year, and that large bump in the top line wasn't due to a big acquisition or one-time gain; Thermo Fisher reported that its organic growth was 51%. It saw strong numbers across multiple segments, particularly its life sciences division, where sales of $4.4 billion rose 138% from the $1.8 billion that it generated in the same period last year. This is the area of the business that the company says has gotten the biggest boost from COVID-19 products and services, which includes testing kits and sample preparation. Overall, the company says $3.2 billion of its revenue in the fourth quarter was due to its COVID-19 response. The strong sales numbers helped Thermo Fisher to more than double its profits during the period, with net income soaring from $1 billion a year ago to $2.5 billion this past quarter.

Later on in the month, the company announced it would be hiking its dividend payments by a whopping 18%. Investors who buy the stock now will be collecting $0.26 in dividends every quarter, good for a modest yield of 0.19% (although this is well below the S&P 500 average of about 1.6%).

Even though Thermo Fisher is getting a boost in sales as a result of the pandemic and more demand for its testing products, the business was still growing and doing well even before COVID-19. This is a low-risk healthcare stock that investors can hold in their portfolios for years and not lose a minute of sleep over. It is proving to be adaptable even during adverse situations like a pandemic, which is just what long-term investors hope to see.

In the past year, shares of Thermo Fisher have increased by 48%, outpacing the S&P 500, which is up a more modest 24% during the same time frame.

2. Microsoft

Another solid investment you can buy and forget about is the well known tech giant Microsoft. Its recent margins have been even better than Thermo Fisher's. Over the past five fiscal years, at least 15% of Microsoft's sales have made it through to the bottom line. And over the trailing 12 months, its profit margin is over 33%.

Microsoft's business is great, because whether people are staying at home due to COVID-19 or the economy is doing well and workers are at their offices, companies will still use their software. Its latest quarterly results came out on Jan. 26 and showed sales of $43.1 billion for the last three months of 2020 were up 17% from the prior-year period.

Microsoft's business shows even greater breadth than Thermo Fisher's does. For example, Microsoft generated more than 20% growth from five different products and services. Its cloud-based business, Azure, grew at a rate of 50%, followed by 40% growth for Xbox-related revenue, a 26% increase in server products and cloud services, LinkedIn's sales rose by 23%, and its Office 365 commercial business delivered revenue that was 21% higher than it was a year ago.

The company's broad mix of products and services is one of the reasons investors love this business, which today is worth $1.71 trillion. And Microsoft isn't just sitting back, either. Last month, it announced that it would be working with Volkswagen to develop an automated driving platform that utilizes Azure.

While its valuation may seem high, Microsoft is arguably one of the safest tech stocks to invest in because many of its products are used by businesses on a daily basis and are practically indispensable. And the business continually looks for new ways to grow, making it an ideal long-term investment. Like Thermo Fisher, Microsoft also pays a small dividend, which yields a little under 1% right now. Over the past 12 months, the stock has risen by more than 30%.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$261.50 (0.15%) $0.38
Volkswagen Aktiengesellschaft Stock Quote
Volkswagen Aktiengesellschaft
VWAGY
$19.89 (-0.75%) $0.15
Thermo Fisher Scientific Inc. Stock Quote
Thermo Fisher Scientific Inc.
TMO
$539.38 (-0.38%) $-2.04

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