No risk, no reward. That's a fundamental part of investing. However, some stocks are less risky than others and still offer strong growth prospects.
Three Motley Fool contributors think they've found relatively safe growth stocks you can buy and hold. Here's why they picked Eli Lilly (LLY 1.01%), Novo Nordisk (NVO +1.23%), and Vertex Pharmaceuticals (VRTX +0.87%).
Closing in on a trillion-dollar valuation
Prosper Junior Bakiny (Eli Lilly): Many high-growth stocks have a reputation for being somewhat risky and volatile. This is not so for Eli Lilly, a drugmaker that has crushed the market over the past decade. Eli Lilly has produced important clinical progress over the years. Among the most recent advances, Zepbound takes the cake. This obesity medicine was officially granted the green light in November.
NYSE: LLY
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It is already facing shortages. That's not good for patients, but it sends an important message: Zepbound is incredibly popular and should remain one of the leaders in the fast-growing weight-loss market. But that's just the tip of the iceberg for Eli Lilly. It has substantially changed its product mix in the past five years; it is still going strong; and there are plenty of exciting medicines in Eli Lilly's pipeline.
Investors are more interested in late-stage programs that could contribute to drugmakers' top line relatively soon, but some of Eli Lilly's early-stage candidates show incredible promise. The company is looking to develop a gene-editing cure for hearing loss. The pharmaceutical giant is also an excellent pick for income seekers. Eli Lilly has doubled its payouts in the past five years. Eli Lilly's strong clinical, regulatory, and financial performances in recent years have helped it become one of the largest healthcare stocks by market cap, at $713 billion.
Within five more years, Eli Lilly could easily join the exclusive group of trillion-dollar companies. But that won't be the end of Eli Lilly's growth story: Given its innovative abilities and strong business, expect the healthcare giant to continue delivering outsized returns for a long time. In short, Eli Lilly's is an incredibly safe and attractive growth stock to buy and hold.
Novo Nordisk's strong fundamentals and solid growth opportunities make it a no-brainer buy
David Jagielski (Novo Nordisk): Often, if you're investing in a growth stock, you have to take on a fair bit of risk. But that isn't the case with healthcare company Novo Nordisk, which is the big name behind Ozempic. The company's business has a strong core that centers around diabetes and weight-loss medications. And with strong margins, this is one of the safer growth stocks you can put in your portfolio for the long haul.
NYSE: NVO
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For long-term investors, what makes Novo Nordisk appealing is that it generates high margins and that its valuation isn't so extreme it's susceptible to a sell-off. Last year, the company's net-profit margin was an incredible 36% of revenue as Novo Nordisk's top line grew by 31% to 232.26 billion Danish kroner ($34.8 billion).
The success of its weight-loss drug Wegovy and of Ozempic, which is a diabetes drug patients have been using off-label for weight loss, have been keys to the company's growth. And Novo Nordisk is still investing heavily into expanding its manufacturing efforts to help meet demand. There's still a lot of growth out there for the company to grow its top and bottom lines even further in the future.
The stock trades at 46 times trailing earnings. But with a lot more growth coming in the future, it's arguably not that expensive of a growth stock to own. Rival Eli Lilly trades at a multiple of around 130. Novo Nordisk is a far less risky buy in that sense, and with the U.S. Food and Drug Administration (FDA) recently approving Wegovy as a treatment to help reduce cardiovascular risk, this is a stock with loads of long-term potential; its current price could look like a bargain in a few years.
Dependable revenue plus tremendous growth prospects
Keith Speights (Vertex Pharmaceuticals): It's hard to think of a more dependable revenue source than life-saving drugs that have no competition. That's what Vertex Pharmaceuticals has with its cystic fibrosis (CF) therapies. This monopoly in treating the underlying cause of CF makes Vertex a relatively safe stock, in my view.
NASDAQ: VRTX
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But what really excites me about Vertex is its tremendous growth prospects. We can start with CF. The company plans to file for FDA approval of a triple-drug combination featuring vanzacaftor this summer. The combo topped Vertex's best-selling CF drug Trikafta in late-stage testing.
Vertex's newest product, Casgevy, should be on its way to becoming a blockbuster. The gene-editing therapy provides a one-time functional cure for the rare blood disorders sickle cell disease and transfusion-dependent beta thalassemia.
After reporting positive results from phase 3 studies of VX-548, Vertex is on track to file for FDA approval of the non-opioid drug in treating acute pain by mid-2024. It's also evaluating VX-548 in phase 2 testing in treating peripheral neuropathic pain.
The company announced earlier this month that it advanced inaxaplin into phase 3 development. This experimental drug targets the underlying cause of APOL1-mediated kidney disease (AMKD). Vertex's planned acquisition of Alpine Immune Sciences will give it another promising late-stage drug targeting a rare kidney disease.
At first glance, Vertex might seem a little pricey with shares trading at 28.3 times trailing-12-month earnings. However, the big biotech's growth prospects put its valuation in a completely different light. I think Vertex's price-to-earnings-to-growth (PEG) ratio of 0.53 makes this stock a bargain.
