2022 has been a brutal year for the stock market with the S&P 500 down 22%. The primary impetus for this weakness is inflation and the Fed raising rates. 

This is because earnings have continued to grow, and while the economy has slowed, it continues to expand as evidenced by metrics like consumer spending and employment data. Another sign of strength is that profit margins have also remained quite strong.

Of course, it’s quite possible that earnings will start to deteriorate and follow other indicators lower if inflation persists. This is certainly a challenging situation for investors and requires more discipline in terms of execution and managing risk and more precision in terms of stock selection.

The best companies to own amid these circumstances are companies with favorable valuations, strong earnings growth, and a wide moat around its business. Within this category, it’s best to focus on companies that also have defensive characteristics and whose business is less susceptible to changes in monetary or economic policy. 

In today’s article, I want to talk about one such stock – Vertex Pharmaceuticals (VRTX). Read on to find out why it’s our growth stock of the week…

Company Background

VRTX discovers and develops small-molecule drugs for the treatment of serious diseases. Its key drugs are Kalydeco, Orkambi, Symdeko, and Trikafta for cystic fibrosis, where Vertex therapies remain the standard of care globally. The company also focuses on developing treatments for pain, type 1 diabetes, inflammatory diseases, influenza, and other rare diseases.

The company’s cystic fibrosis drugs are poised to continue dominating the market for the foreseeable future due to the disease-modifying potential of the drugs, consistent use by patients, and very little competition. VRTX combination therapies also have lengthy patents, which protect its cystic fibrosis portfolio from generics. There is also potential for its non-cystic fibrosis pipeline, which has exposure to promising areas, such as AAT deficiency, sickle cell disease, and beta-thalassemia.

Growth

As mentioned above, most companies’ growth prospects will deteriorate with the economy. Not the case for pharmaceutical companies like VRTX. This is because healthcare spending is related to trends like demographics and increasing government spending on healthcare.

In particular, VRTX is the only pharma company with a treatment for cystic fibrosis. And, this should continue to grow at a healthy pace as it gets approval into new markets and for younger ages. The company’s pipeline is also well-stocked with candidates for diabetes, including a treatment that would replace pancreatic cells that just delivered promising results in clinical trials. 

Value

Despite this impressive growth, VRTX is quite cheap with a forward P/E of 19 which is slightly higher than the S&P 500’s forward P/E. Yet, this is justified given that VRTX has much less risk of an earnings decline due to being in the healthcare industry and its strong pipeline of products.

The company also stands out with its 38% profit margins which are more than 3x the S&P 500’s 12.2% profit margins. Further, VRTX has more pricing power and is less subject to inflationary pressures which some expect to lead to some margin compression for many stocks.

POWR Ratings

VRTX has an overall grade of A which equates to a strong Buy rating in the POWR Ratings service. A-rated stocks have posted an average annual performance of 31.1% which compares favorably to the S&P 500’s average annual gain of 8.0%. 

VRTX also has strong component grades including an A for Quality due to 11 out of 19 analysts covering the stock having a Strong Buy rating with only 2 having a Sell rating. It’s also regarded as one of the top companies in the space due to its dominance of the CF market and strong pipeline of potential, blockbuster treatments. Click here to see more of VRTX’s POWR Ratings.

VRTX shares were trading at $294.89 per share on Thursday morning, up $2.87 (+0.98%). Year-to-date, VRTX has gained 34.29%, versus a -20.88% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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