When trying to determine which stocks to buy, look at a company's track record. Of course, the past is never a guarantee of future success, but corporations that have performed well for extended periods didn't do so through sheer luck.
The market will likely continue rewarding whatever qualities have allowed them to deliver outsize returns. So, investors have to figure out whether a company will keep doing what has made it successful.
That said, let's look at two stocks that have historically delivered significantly above-average returns and still look like great buys: Johnson & Johnson (JNJ -0.46%) and Intuitive Surgical (ISRG 0.59%).
1. Johnson & Johnson
Johnson & Johnson, one of the largest healthcare companies in the world, has been around for decades, has historically crushed the market, and continues to generate steady revenue and profits.
JNJ revenue (annual) data by YCharts.
The drugmaker derives its success from several sources, but let's consider just three. First, the company is a proven innovator in healthcare. There is always a need for better, safer, more effective therapies or medical devices. And unlike new laptop or smartphone models, new medicines and medical devices are crucial to the lives of patients. It's hard to find a company that has consistently delivered more than Johnson & Johnson on that front.
Second, the drugmaker has extensive experience in this highly regulated industry. Developing new drugs and devices involves going through various legal and regulatory mazes. Johnson & Johnson has deep expertise in that, a significant advantage over newcomers in the field.
Third, it has a solid balance sheet, being one of the rare companies with an AAA credit rating from Standard & Poors. These and other factors explain its success.
But can the company continue to deliver? It's now facing serious legal issues, including thousands of lawsuits alleging that its talc-based baby powder caused cancer, and the Inflation Reduction Act (IRA), which will allow Medicare to negotiate prices for certain drugs.
Despite these very real headwinds, Johnson & Johnson remains a solid buy for long-term and income investors, primarily because it can deal with these problems.
Consider the IRA: Johnson & Johnson is one of several drugmakers challenging the legislation in court. But even if the law stands up, it shouldn't make much of a dent on its financial results in the next few years because the company should be able to work around it.
Just as important as Johnson & Johnson's ability to deal with these obstacles and navigate the industry's other challenges, it remains an innovator with an extensive pipeline and has a rock-solid balance sheet.
Lastly, it has raised its dividend annually for 61 consecutive years, so despite the drugmaker's problems, long-term investors can safely buy the stock.
2. Intuitive Surgical
Intuitive Surgical focuses on medical devices and is best known for its da Vinci system, a robotic-assisted surgical (RAS) device. First approved in 2000, the da Vinci has helped Intuitive deliver outsize returns since then as the first RAS device cleared in the U.S.
It allows physicians to perform minimally invasive procedures, which result in less cutting of the skin, less bleeding, less scarring, and faster recovery times.
It undisputed leadership in the RAS market has been the main driver of Intuitive Surgical's performance over the past couple of decades.
ISRG revenue (annual) data by YCharts.
The company is now being challenged by other healthcare giants, including Johnson & Johnson and its Ottava RAS system and Medtronic's Hugo. Even so, Intuitive should be just fine. Less than 5% of surgeries that could be performed robotically are done that way, so Johnson & Johnson, Medtronic, and others have plenty of room to grow without taking business away from Intuitive.
Besides, entering this industry is highly capital-intensive. Building a robotic system is hard enough, but it's just the first step. It then needs to be tested and navigate various regulatory barriers. And these high barriers protect Intuitive's business, at least to some extent.
While the company's procedure volume stalled in the early days of the pandemic, that's just a temporary hiccup and will rectify itself over the long run. Intuitive Surgical should continue posting excellent returns for years as it makes headway into the RAS market.
