All great growth stocks have a couple of basic traits in common. Perhaps the most important, though, is a company's ability to build a wide competitive moat to protect its profits over the long haul. By protecting its core revenue drivers, these types of companies can steadily build large cash positions, which can then be used to reinvest in the business.
But that's not all. The best growth companies also tend to have goldstar management teams capable of creating additional value for shareholders through the savvy deployment of capital.
In the ongoing era of the value tilt, growth companies with a nearly insurmountable economic moat and top-shelf management teams have drastically outperformed the broader field. This effect can be seen in the incredible year-to-date performance of the Vanguard Growth Index Fund (VUG 1.74%).
This low-cost exchange-traded fund is heavily skewed toward giant growth companies like Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla, Meta Platforms, and Eli Lilly. So far this year, the Vanguard Growth Index Fund has churned higher by an impressive 28.6%, far outpacing the roughly 12% total gain in the benchmark S&P 500 index.
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This top-performing growth stock still has room to run
Vertex Pharmaceuticals (VRTX 0.23%), a large-cap biotech company, has rivaled the performance of the Vanguard Growth Index Fund in 2023. At the time of this writing, the rare disease specialist's shares were up by a staggering 27.9% for the year. What's more, Vertex's stock has markedly outperformed the Vanguard Growth Index Fund, along with the S&P 500, over the past five years:
Vanguard Growth Index Fund Total Return Level data by YCharts.
As all stock pickers know, though, past performance is not a reliable indicator of future returns. In this case, however, Vertex appears set to clobber the broader markets yet again in 2024.
Why? The main reason is its top-selling cystic fibrosis (CF) treatment, known as Trikafta. Among the biotech's four CF therapies approved by the Food and Drug Administration (FDA), Trikafta presently accounts for approximately 89% of the company's sales in this area and almost all its growth.
While such a heavy revenue concentration is normally frowned upon by investors, this situation is unique because Vertex's CF therapies really have no viable competitors. As a result, the biotech's top line is forecast to rise by another 6.8% in 2024, which comes on the back of a 10%-plus rise in annual sales this year.
But there's so much more. Since 2014, Vertex has been working to diversify beyond CF, and this effort could pay off with a major regulatory approval in sickle cell disease (SCD) this coming December.
Specifically, Vertex and partner CRISPR Therapeutics are expecting to learn the regulatory fate of their co-developed gene-edited therapy, exa-cel, from the FDA before year's end. If approved, Wall Street analysts think the therapy could hit $1 billion in sales by the end of the decade.
Additionally, Vertex's pipeline is loaded with high-value candidates for acute pain, APOL1-mediated kidney disease, and type 1 diabetes. In short, there's a lot to like about this top biotech company.
Verdict
At first glance, Vertex's shares may seem a bit expensive. The biotech is trading at approximately 23.4 times projected earnings, after all. By comparison, its peer group average is closer to 18 times forward-looking earnings.
However, this classic metric arguably isn't the best way to value this ultra-high-growth stock. Instead, investors are probably better served by relying on the price-to-earnings-to-growth ratio (PEG ratio).
With a PEG ratio of 0.53, Vertex's stock actually looks incredibly cheap. A PEG ratio under 1 is generally considered undervalued.
Moreover, this exceptionally low PEG ratio implies that Vertex should continue to post stellar levels of growth over the next five years. In other words, Vertex's blistering growth rate isn't expected to be an ephemeral trend but rather a core feature of the company.
In all, this large-cap biotech should continue to deliver market-beating returns thanks to its wide economic moat, laser-like focus on underserved indications, and emphasis on innovation.
