Being a buy-and-hold investor has advantages. For instance, it can be less stressful than day trading, and the combination of time and compounding is a powerful wealth generator. However, with hundreds of options, it can be a challenge to figure out which stocks to buy for the long term. Turning to the healthcare sector is a good idea since medical care will still be in high demand 50 years from now, as it has always been.
Let's look at two healthcare companies whose shares are worth buying and holding on to for good: Vertex Pharmaceuticals (VRTX -0.06%) and Novartis (NVS -1.64%). These stocks will appeal to different types of investors. Let's dig in.
1. Vertex Pharmaceuticals
Vertex Pharmaceuticals has been an outstanding performer over the past decade. Its stock price is up significantly, and revenue and earnings have skyrocketed, too, all thanks to its success in treating a rare disease called cystic fibrosis (CF).
The biotech famously holds a monopoly in this field. But one criticism some bears have had against the company is that it is a one-trick pony. In October 2020, Vertex Pharmaceuticals' shares dropped like a rock after it decided to discontinue a phase 2 clinical trial for VX-864, a non-CF program targeting alpha-1 antitrypsin deficiency that many thought was promising.
But the biotech moved forward with several other promising candidates since then. Vertex Pharmaceuticals is now on the verge of earning approval for exa-cel, a gene-editing therapy it developed in collaboration with CRISPR Therapeutics. There are several other exciting programs targeting acute and neuropathic pain, type 1 diabetes (T1D), APOL1-mediated kidney disease, and of course, CF.
Currently, no approved treatment addresses the underlying cause of APOL1-mediated kidney disease, while there is no functional cure for T1D. In other words, Vertex Pharmaceuticals' strategy is to target areas with significant unmet needs, just as it did with its successful CF franchise. Exa-cel also falls into this category: It treats two rare blood diseases with few effective therapy options. It could have a total addressable market of upwards of $64 billion.
Vertex Pharmaceuticals won't always hit it out of the park with its programs. No biotech company can do that. But Vertex Pharmaceuticals' culture is centered around innovation, breaking new ground, developing much-needed therapies, and making a boatload of money. The company has done it in the past, much to the benefit of its shareholders.
VRTX Free Cash Flow data by YCharts.
Over the last several years, Vertex Pharmaceuticals' free cash flow has increased almost without fail, as has its free cash flow to assets. Further, Vertex's return on assets (ROA) and return on equity (ROE) have also grown or held steady. Given that Vertex Pharmaceuticals' financial results and key ratios have been reliably northbound for a while is a result of the underlying culture that is the engine behind its growth story, and that's what makes it a stock worth parking in a growth-oriented portfolio for good.
2. Novartis
Novartis is a Switzerland-based pharmaceutical giant with a long list of products spanning several therapeutic areas, including oncology, immunology, cardiovascular health, and more. The company has delivered solid financial results of late. In the second quarter, net sales of $13.6 billion increased 7% year over year, a reasonable growth for a pharmaceutical company of this stature. Novartis' adjusted net income jumped by 11% year over year to $3.8 billion.
However, Novartis hasn't been a good company to invest in over the past 10 years.
Still, investors should consider a few things. First, Novartis is getting a makeover. It is currently in the process of spinning off its generic drugs unit, Sandoz. This isn't the first such spin-off in the pharmaceutical industry in recent years. When announcing this move, Novartis stated its intentions to become "a focused innovative medicines company with a stronger financial profile, and improved return on capital."
The generics drug market has been struggling over the past few years, so shedding this unit could help Novartis improve revenue and earnings growth over the long run. Second, Novartis' pipeline is impressive in its breadth and depth. The company's dozens of programs include brand-new clinical compounds across multiple areas, and, of course, it is also going after label expansions for existing medicines.
Third, Novartis is a solid dividend stock. The company currently offers a yield of 3.40%, and it announced its 26th consecutive year of a dividend increase earlier this year. Its cash payout ratio is about 57.3%, a reasonable number that should afford it and its shareholders more dividend hikes. Novartis isn't for growth investors, but for those looking for a stable, blue-chip dividend stock likely to keep its payouts alive and growing for a long time; it is an excellent pick.
