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Forget Penny Stocks: Buy These 2 Stocks Instead

By Manali Bhade - May 1, 2021 at 6:30AM

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These two stocks are attractive buy-and-hold picks for long-term investors.

Investing in penny stocks is risky. Companies with extremely low market caps are highly susceptible to new headlines and sometimes, manipulation through collaborated efforts of online communities. However, many retail investors seem to be ignoring the penny stock volatility in their search for the next GameStop (GME -4.09%). The exuberance is understandable, considering that GameStop has soared by more than 2,800% in the past year.

However, this is not the only way to create wealth. In fact, retail investors can avoid much of the pain of high volatility and still earn handsome returns by going for fundamentally strong stocks riding solid structural trends. Okta (OKTA -4.79%) and Vertex Pharmaceuticals (VRTX -3.88%) are two such stocks that can win patient investors attractive returns.

Woman studying stock charts on computer

Image source: Getty Images.

1. Okta

Okta offers cloud-native workforce identity and customer identity solutions to help clients verify the authenticity of their employees and customers and then authorize appropriate data access. The company's share price has gained over 82% in the last year, mainly due to the explosion in demand for identity solutions driven by COVID-related lockdowns and the subsequent shift to work-from-home arrangements.

In fiscal 2021 (ending Jan. 31, 2021), Okta's revenues jumped 43% year over year to $835.4 million. Its non-GAAP net income was $16.2 million, which was a dramatic improvement from the non-GAAP net loss of $31.1 million in the year prior.

Subscription revenues accounted for more than 95% of Okta's total fiscal 2021 revenues, which implies that the company has significant revenue visibility. Okta's dollar-based net retention was 121% for Q4, highlighting the company's robust capability to cross-sell and upsell its products to existing customers.

At the same time, the company added over 2,000 new customers in fiscal 2021 and reached a customer count of 10,000. The number of customers with an annual contract value over $500,000 and $1 million rose year-over-year by more than 50% in fiscal 2021. This reflects the company's success in rapidly acquiring large enterprise customers, which are more resilient to macroeconomic conditions.

However, the demand for Okta's offerings will persist even after the pandemic, considering that many businesses that have already shifted to cloud architecture will continue to require identity management solutions. This is reflected in the company's remaining performance obligations (RPO), or non-cancellable order backlog, which were up 49% year over year to $1.8 billion at the end of fiscal 2021.

With the company's current RPO (part of the RPO to be recognized in the next 12 months) growing 42% year over year to $841.8 million -- slower than the growth rate of total RPO --  it is obvious that customers are entering into long-term contracts with Okta. The recent acquisition of Auth0 in an all-stock deal priced at $6.5 billion is expected to further bolster Okta's customer identity management capabilities, and also help the company penetrate international markets.

Okta expects fiscal 2022 (ending Jan. 31, 2022) revenues to be in the range of $1.08 billion to $1.09 billion, which implies year-over-year growth of 29% to 30%. Yet, it still leaves huge growth potential for Okta, considering that the company has estimated the total addressable market (TAM) for workforce identity and customer identity solutions to be around $65 billion. The company is also targeting an additional TAM worth $15 billion, by entering two adjacent areas of privileged access management (PAM) and identity governance and administration (IGA).

Okta is currently trading at over 41 times trailing 12-month (TTM) sales, which is quite pricey. However, considering the huge TAM, high-order visibility, robust customer acquisition trends, and the company's flawless execution, the stock seems poised to grow even more in the coming months.

2. Vertex Pharmaceuticals

Vertex Pharmaceuticals dominates the global cystic fibrosis (CF) market with its four drugs -- Kalydeco, Orkambi, Symdeko/Symkevi, and Trikafta. Trikafta is by far the most important drug in the fight against CF -- a potentially fatal genetic condition that affects the lungs and the digestive systems of around 70,000 patients globally. Approved by the U.S. Food and Drug Administration (FDA) in October 2019, Trikafta can treat almost 90% of the total CF patient population.

Trikafta accounted for more than 62% of Vertex Pharmaceuticals' fiscal 2020 revenues. While the drug has already reached out to most of the eligible CF patients in the U.S. aged 12 and older, the company will be focusing on maintaining a high compliance rate for the drug in fiscal 2021. The company is now awaiting regulatory approvals for Trikafta in additional geographies and for patients aged six to 11.

For years now, Vertex Pharmaceuticals has successfully translated its leadership in CF space into robust revenue streams. In fiscal 2020 (ending Dec. 31, 2020), the company's revenues soared 55% year over year to $6.2 billion, while non-GAAP net income jumped 96% year over year to $2.7 billion. The company's cash balance also increased by 76.3% year over year to $6.7 billion at the end of fiscal 2020.

Vertex Pharmaceuticals is also striving to expand its product portfolio beyond CF. The company is collaborating with CRISPR Therapeutics (CRSP -5.41%) in the development of a gene therapy, CTX001, for patients suffering from transfusion-dependent beta thalassemia and severe sickle cell disease. While it's still in an early stage of the clinical development process, CTX001 has demonstrated the ability to reduce these patients' dependence on frequent blood transfusions.

The company is also aiming to release results from a phase 2 proof-of-concept study evaluating investigational asset VX-864 as a treatment for alpha-1 antitrypsin deficiency (AATD) by mid-2021. While these pipeline drugs must pass several clinical and regulatory milestones to reach the commercialization stage, Vertex Pharmaceuticals is banking on these assets to help reduce its reliance on the CF franchise.

Despite the many pros, Vertex Pharmaceuticals' share price is down by around 13% in the past year. Investors are concerned about the company's potential in non-CF areas, especially after it had to close the clinical program for the previous AATD drug candidate, VX-814, due to safety concerns. However, a valuation of just over 9.2 times TTM sales seems way too low for a large biotech company with a strong niche and stellar financial performance.

Currently trading almost 30% below its all-time high, Vertex Pharmaceuticals offers a favorable risk-reward proposition to retail investors and has the potential to grow much higher in the coming months.

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Stocks Mentioned

Okta Stock Quote
Okta
OKTA
$92.60 (-4.79%) $-4.66
Vertex Pharmaceuticals Incorporated Stock Quote
Vertex Pharmaceuticals Incorporated
VRTX
$276.17 (-3.88%) $-11.15
GameStop Corp. Stock Quote
GameStop Corp.
GME
$124.38 (-4.09%) $-5.31
CRISPR Therapeutics Stock Quote
CRISPR Therapeutics
CRSP
$63.28 (-5.41%) $-3.62

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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