The year 2022 was quite difficult for the U.S. equity market. Major indices such as S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average fell by around 19%, 34%, and 9%, respectively, in the past year.
Despite the broad sell-off, a few stocks, such as Pinduoduo (PDD -0.05%) and Vertex Pharmaceuticals (VRTX 0.32%), managed to excel even in the difficult macroeconomic environment thanks to a solid growth story and robust financials.
Here's why these stocks continue to be smart picks even in January 2023.
1. Pinduoduo
China-based e-commerce player Pinduoduo built an online marketplace to bring cheap and high-quality products (electronics, fashion, household items) and agricultural produce to price-conscious consumers. This niche fared exceptionally well in the turbulent economic environment of 2022.
Not surprisingly, the company surpassed Wall Street's top and bottom-line estimates in the third quarter (ended Sept. 30, 2022). Revenue was up 65% year over year to $4.99 billion (ahead of the consensus estimate of $4.31 billion), while non-GAAP (adjusted) earnings per share rose 256% year over year to $1.21 (outpacing the consensus estimate of $0.65). Thanks to the solid financial performance, the company's share price was up over 97% in the last year.
Pinduoduo benefited from strong network effects. The company focuses on expanding the catalog of cost-effective products, bringing in more customers with diversified needs to its marketplace. The large customer base resulted in merchants offering even more choices to consumers, thereby driving a virtuous cycle of increasing supply and demand.
Pinduoduo invested extensively to improve agricultural technology, as evidenced by the "10 Billion Agriculture Initiative" launched in August 2021. Although this campaign is affecting earnings in the short run, the subsequent innovations in digital technology are expected to help optimize the supply chain and development of the manufacturing segment associated with the agricultural sector. The company is banking on its agricultural strategy to create long-term value for its investors.
Besides success in the Chinese market, Pinduoduo is making its presence felt in international markets. In September 2022, the company entered the U.S. market with a Temu e-commerce site offering high-quality, affordable products.
Beyond a solid strategy, Pinduoduo also has sufficient resources to execute it. The company reported cash of $19.4 billion and total debt of only $2.2 billion at the end of the third quarter. Hence, although Chinese stocks are subject to delisting risks and suffer from overall poor investor sentiment, Pinduoduo seems to be a good quality pick for 2023.
2. Vertex Pharmaceuticals
Biotech giant Vertex Pharmaceuticals' share price grew by more than 30% in 2022 -- a solid performance in the otherwise difficult year. The company has six drugs in its cystic fibrosis (CF) portfolio for a global market expected to be worth $13.9 billion in 2025.
CF is a life-threatening genetic pulmonary disorder characterized by the formation of thick mucus in the lungs, which makes it difficult for the patients to breathe. Combination therapy Trikafta is the major growth driver and accounted for over 86% of the company's third-quarter revenues (ended Sept. 30, 2022). While the drug reported steady uptake in the U.S., it is witnessing much stronger growth in international markets. The company is also focusing on expanding the label of Trikafta and other CF drugs, such as Orkambi and Kalydeco, across different age groups of patients, which will drive future revenue growth.
Vertex also has a robust pipeline of 18 programs focused on developing therapies in indications such as sickle cell disease, pain relief, APOL1-mediated kidney disease, and diabetes. While not much can be predicted about the commercial potential of these investigational drugs, they highlight the company's efforts in diversifying its revenue base beyond CF. Vertex and its partner, CRISPR Therapeutics (CRSP -1.39%), are also expecting to secure regulatory approvals for investigational gene therapy exa-cel in sickle cell disease and beta-thalassemia indications in the U.S. and Europe in 2023.
Thanks to its near-monopoly in CF, Vertex boasts impressive financial metrics.
Revenue grew annually at a compound average growth rate of 28.1%, from $1.7 billion in 2016 to $7.6 billion in 2021. The company also guided for fiscal 2022 product revenues of $8.8 billion to $8.9 billion, implying 21% year-over-year growth at the midpoint.
Vertex also has a strong balance sheet, as is evident from the cash position of $9.8 billion and total debt of only $825 million at the end of the third quarter.
No doubt Vertex's over-reliance on CF drugs exposes the company to business concentration risks. However, the risk is significantly mitigated by the company's promising research pipeline and robust financial position, thereby making it an attractive pick for 2023.
