While 2022 was disastrous for much of the market, 2023 is shaping up to be much better, with the S&P 500 already up nearly 15% so far this year. Long-term investors understand that these ups and downs are just the cost of trading stocks and that the market and risk are inextricably linked. That's why buying (and then holding) stocks of resilient companies that can weather the inevitable market highs and lows and keep moving forward is a proven long-term strategy for profitable returns.
Two companies being featured today operate in high-growth industries with plenty of opportunity for expansion. And their stocks trade at a discount right now. Let's look at why these two magnificent stocks are such screaming buys this month.
1. Medtronic
Medical device manufacturer Medtronic (MDT 0.62%) has a knack for maintaining business stability, especially in challenging years for the market. It sells medical devices all over the world, helping treat 70 different medical conditions. It operates in four product categories: cardiovascular, medical-surgical, neuroscience, and diabetes. The global medical device market is definitely in expansion mode, with a compound annual growth rate of 5.5% expected between 2022 and 2029. Medtronic, with its diverse portfolio, has the opportunity to capture more than its fair share of that future growth.
Medtronic's revenue and earnings have steadily increased. This year, management implemented an "aggressive transformation" strategy to manage short-term headwinds and continue to improve earnings by lowering costs. The strategy appears to be working well, but it also helps that headwinds are easing.
Total revenue increased 5.6% year over year to $8.5 billion in the fourth quarter of fiscal 2023 (ended April 28). Adjusted earnings per share (EPS) increased by 3% year over year to $1.57. According to management, a rebound in procedure volumes, increased supply, and new products all contributed to this performance. Medtronic anticipates a strong finish to fiscal 2024 as elective procedures are back in demand now.
Medtronic also has many innovative products in its pipeline to help drive future growth. The U.S. Food and Drug Administration (FDA) recently approved its MiniMed 780G advanced insulin pump that could help people with type 1 diabetes by tracking meal times and adjusting insulin levels. Around 8.7 million suffer from type 1 diabetes worldwide according to 2022 statistics. This product could be a blockbuster for Medtronic.
Furthermore, management seems pleased with the successful international roll-out of the company's robotic-assisted device, Hugo. The device will be launched soon in the U.S. markets as well. The robotic surgery market could be worth $15 billion by 2029, according to BIS Research. In this massive market, Medtronic has a lot of room to grow.
Consistent growth helped Medtronic raise dividends every year for the past 46 years and the $0.69 per share dividend is up 146% in the last decade. Its yield is 3.4%, double the S&P 500's 1.7% average. At the end of fiscal 2023, Medtronic generated $4.5 billion in free cash flow, which could be used to fund future growth. It remains committed to returning 50% of free cash flow to shareholders through dividends and stock buybacks.
As for why the stock is a buy now, Medtronic's forward price-to-earnings (P/E) ratio of 17.6, is better than the medical devices industry's 3-year average forward P/E ratio of 54.1. Given the long-term potential of the company and its reliable dividends, it is a good choice for both growth and income-seeking investors.
2. Cresco Labs
Cannabis stocks have somewhat fallen out of favor lately over concerns about the lack of progress toward federal legalization in the U.S., but some still have enormous long-term potential even if legalization never comes. Investors with a high risk tolerance might be interested in Cresco Labs (CRLBF 5.13%), a cannabis multi-state operator (MSO). Even with its relatively small number of stores, Cresco still managed to generate $843 million in revenue in 2022, putting it in direct competition with its larger peers.
Oversupply from increased competition led to pricing issues that hit all marijuana growers over the past couple of years. It took a toll on Cresco's first-quarter results as well. In the first quarter, revenue was down 9% year over year to $194 million. One factor that pressured revenue was a 5.6% drop in Cresco's Illinois cannabis sales as Missouri's recently legalized recreational market caught the attention of buyers in bordering states (The company does not yet have any stores in Missouri). Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also dropped by 42% year over year to $29.3 million.
Cresco is not yet profitable, but it is moving in the right direction. To save money, it closed down underutilized and unprofitable facilities in California and Arizona. This year, its primary goal is to increase margins and generate free cash flow. Generating free cash flow will also assist Cresco in reducing its debt burden, which increased this year in anticipation of its acquisition of peer cannabis company Columbia Care (CCHWF -2.00%). Cresco has a relatively high debt-to-equity ratio of 0.76. The company had $90 million in cash, cash equivalents, and restricted cash at the end of the quarter.
The $2 billion deal with Columbia is still pending regulatory approval. If (or when) this transaction closes, Cresco's portfolio will expand by 130 dispensaries, giving it a stronger grip on the American cannabis market. It now has 64 locations across the country. The deal may also enable Cresco to expand into international markets as a larger company. The global cannabis market is currently a lucrative opportunity, with a projected value of $149 billion by 2031.
Experts predict that a few more key states could legalize cannabis this year, providing more opportunities for Cresco's expansion. Cresco's growth may be slow at the moment, but the company has excellent long-term prospects as the market matures.
Patient investors who are willing to wait for this MSO to reach its full potential in the coming years will find it undervalued right now. It is currently trading at a price-to-sales ratio of 0.6, making now an excellent time to invest.
