One of the big advantages individual investors have over fund managers is that no one is looking over their shoulders for quick results. Individuals can invest for the long term; they can hold through volatility and watch their investments provide massive returns over decades.
In this roundtable, three Motley Fool contributors picked healthcare stocks that they believe will be big winners for a long time. Here's why they recommend OrthoPediatrics (KIDS 1.49%), Compass Pathways (CMPS 2.01%), and Nano-X Imaging (NNOX 2.69%).
No breaking this steady growth
Patrick Bafuma (OrthoPediatrics): Over the years, the safety of children has improved tremendously. There are special car seats and bicycle helmets, and many of those whirligigs that would send me flying as a child have since been removed from many public parks.
Despite all of these improvements, children unfortunately do still get hurt from time to time. And OrthoPediatrics is beginning to consolidate and dominate the historically fragmented orthopedic-surgery market for kids.
Previously, if a child needed surgery for a broken bone, adult instruments would be altered to fit the patient. But OrthoPediatrics has changed all of that by offering surgical implants designed for pediatric patients. And this surgical solutions company has slowly but surely become the major player in its niche. It is also the founder of the Foundation of Advancing Pediatric Orthopaedics, and provides over 300 educational events per year.
OrthoPediatrics continues to make opportune acquisitions. After paying just under $20 million for specialty brace maker MD Orthopaedics, the company is guiding for $6 million in fiscal year 2022 revenue from its new acquisition. And MD Orthopaedics has several new products that are in the pipeline, with at least one anticipated to hit the market before the end of the year.
That is just one example of how OrthoPediatrics management has begun to consolidate and dominate the pediatric orthopedic industry, resulting in just over 21% compound annual revenue growth since 2016, excluding 2020 due to COVID-19.
The company is guiding for $127 million to $130 million in revenue for 2022, representing 30% to 33% growth. And since management believes its current total addressable market in the U.S. is $1.7 billion, revenue should continue its rise for years to come for this $1.1 billion healthcare company. With a history of growth, a significant runway ahead of it, and little competition in its niche, investors can feel good about holding OrthoPediatrics for a lifetime.
A novel approach to mental-health care
George Budwell (Compass Pathways): Compass Pathways isn't exactly a household name. The small-cap biotech's shares are currently down by a hefty 45% over the prior 12 months, and its stock generally occupies the low-volume end of the spectrum from a trading standpoint (less than 350,000 shares traded per day on average).
Compass' psilocybin-based depression therapy known as COMP360, however, could revolutionize the field in the not-so-distant future. As a result, investors might want to get acquainted with this under-the-radar life sciences stock soon.
The backstory is that Compass is gearing up to launch a late-stage trial for COMP360 in treatment-resistant depression (TRD). As things stand, there are no gold-star therapies for TRD. This underserved market is also fairly large, with upward of 100 million people worldwide suffering from TRD.
The key takeaway is that any therapy that actually succeeds in late-stage testing for this high-value indication should have a decent shot at quickly achieving blockbuster status (over $1 billion in annual sales). To put this possible revenue haul into context, Compass has a market cap of a mere $717 million at the time of this writing.
What are the downside risks? COMP360's phase 2 trial results did raise some important questions about its safety profile and durability in this patient population. These issues will thus be key to its success in a pivotal phase 3 trial. Moreover, the Drug Enforcement Agency will also have to be willing to reschedule the drug in order for it to become commercially available.
Overall, Compass' stock has the potential to generate life-altering gains for early shareholders. Investors, however, might want to limit their initial position to a modest 100 shares due to the aforementioned risk factors.
Nano-X aims to make X-rays accessible to all
Taylor Carmichael (Nano-X): According to the World Health Organization, roughly two-thirds of the world has no access to diagnostic imaging. This is because high-end X-ray machines are quite expensive. The top-of-the-line computer-assisted tomography (CAT) scanner can run over $1 million and up to $3 million.
Nano-X (also known as Nanox) discovered a breakthrough using cold cathode technology to power up the device. This results in massive savings, allowing Nanox to manufacture the machine for about $10,000. The plan is to pass those savings on to hospitals around the world, giving the machine away at cost or below cost.
Nanox will make money on the use of the machine (the classic razor-and-blades business model). The goal is to make the X-ray ubiquitous around the world.
Management just reported for the second quarter, and the company is on the verge of introducing its machine this year. Nanox is preparing to submit its device to the Food and Drug Administration for clearance. It has already submitted its documents to European regulators. And the company is now initiating deployment in Nigeria, its first country.
The company believes that it will have 15,000 devices in place around the world by 2024. Nano-X has contracted to supply over 6,000 devices already. Strategic investor SK Telecom (SKM -2.04%) will manufacture many of these devices.
I believe this stock will be a huge winner for investors over the next decade, and a key holding in the healthcare universe. Everything starts with diagnostics.