Benjamin Graham, one of the most influential investors ever, once said, "Always buy your straw hats in the winter." We might also add that it's best to stock up on candy after Easter or Halloween, and that January is a terrific time to replenish those Christmas decorations. Graham's advice to investors was that they should buy something with future value while demand is low in order to enjoy the sales price.
That is the theme of these two stocks, which have been punished in the short term despite having tremendous long-term outlooks based on definitive trends.
1. Intuitive Surgical
If you have been to a major U.S. hospital system recently, there is a good chance that it is equipped with a robotic-assisted surgery system. Most likely, that surgery system was developed, manufactured, and sold by Intuitive Surgical (ISRG -1.28%), which holds a nearly 80% share of the global surgical robotics market.
Intuitive is a pioneer in advancing minimally invasive advanced surgical techniques for various procedures, including cardiac, colorectal, gastric, and others. Minimally invasive surgery can make a tremendously positive difference for patients, doctors, hospitals, and insurance companies. Not long ago, doctors could only operate on the heart through open-heart surgery. This involved a long incision, opening the ribs, and other cringe-inducing procedures. With Intuitive's da Vinci surgical system, surgeons can perform several common heart procedures with just a few small incisions. This is truly a game-changer.
Admittedly, COVID-19 stunted the growth of Intuitive, as hospitals with full ICUs cut back on non-emergency surgeries. However, long-term trends -- like a rapidly aging population -- are extremely positive for the healthcare company. Currently, there are more than 46 million adults aged 65-plus, and this number is expected to grow by another 18 million within this decade, reaching 77 million by 2034.
Perhaps the best part of Intuitive's business model is that the vast majority of its revenue comes from recurring sources like instruments and accessories. As the market becomes more saturated with da Vinci surgical systems, hospitals and medical providers will need to continuously replace the device's accessories. This is a textbook "razor-and-blades" model, with the "blade" accessories fueling Intuitive's impressive recurring revenue. In 2021, 75% of the company's $5.7 billion in sales was from recurring sources.
COVID-19 stunted 2020 sales, but revenue came roaring back in 2021 to the tune of a 31% increase, hiking up from $4.35 billion to $5.71 billion. The company is highly profitable; Intuitive's 32% operating margin dwarfs that of competing medical device companies Stryker (NYSE: SYK) and Medtronic (NYSE: MDT).
Intuitive also reported over $8.6 billion in cash and investments on hand at the end of 2021, a massive 8.5% of the market cap, and no long-term debt. The stock has had a rough go in 2022, falling 15% year to date. Given the outstanding financial results and positive long-term demand trends, the time to buy this straw hat may be right now.
2. Builders FirstSource
Housing prices have risen dramatically over the last couple of years. There are several reasons for this, but perhaps the largest is simply a dramatic shortage in the supply of single-family homes. Some estimates put the deficit as high as 6.8 million, while others hover in the 5 million range. It will take many years for builders to make up this supply shortage.
The reason for the shortage is simple. During the Great Recession, demand fell dramatically, so we produced far fewer homes than usual. As the economy recovered, the market picked up, but the supply was way behind the curve. This graph juxtaposes the steep decline in housing starts, or new residential construction projects, against the growing population.
Builders FirstSource (BLDR -2.56%) is becoming a massive company that aims to fill the needs of builders and contractors through numerous strategic acquisitions. The company supplies builders with raw materials, manufactured components, and other services throughout the building process. Manufactured components, also called value-added products, can be invaluable to contractors struggling to find skilled labor and streamline operations. Using Builders FirstSource's "pre-fab" components, like roof or floor trusses, reduces worksite clutter and labor needs.
This building materials and manufactured components company has wide reach, serving 85 of the top 100 metro areas in 42 states. In 2021, overall sales ballooned 56% to $19.9 billion, and 21% of this growth was organic. But the company has made immense strides to become more than just a lumber supplier, with value-added manufactured components being a significant part of its success. Organic sales of value-added products grew about 30% in 2021.
Builders FirstSource is also making forays into the digital realm of the building process with its acquisition of Paradigm. Paradigm provides software solutions, such as estimating and configuration tools, to streamline the building process from start to finish.
The stock is trading at a price-to-earnings (P/E) ratio not seen since the March 2020 crash. On Feb. 15, 2020, the P/E ratio was above 14 and now trades near 7.5. Management also has a $1 billion stock buyback authorization to utilize. Some analysts are concerned with short-term trends in lumber prices and housing demand; however, they may be missing the forest for the trees.
Maximizing your $5,000
An investor looking to allocate a $5,000 investment may consider splitting it equally between the two companies. This will increase portfolio diversity and give exposure to two terrific companies. For those looking to add just one position, Intuitive Surgical is a better choice for a risk-averse investor because of the company's entrenched market position, immense cash balance, and high margins. On the other hand, while it comes with more risk, Builders FirstSource may have a higher upside because of the low P/E, share repurchase program, and immense growth through acquisitions.