The stock market is in the midst of a powerful and blistering rally.

There’s a vigorous debate about whether a new bull market has begun or if is this just a head fake within a bear market. Even among those who agree about the destination - disagree about how the market gets there.

Rather than dive into these arguments, it’s better to focus on high-conviction ideas. One of these is that the biotech sector has bottomed even if the broader market may not have. In the biotech sector, investors should target high-quality stocks with strong pipelines. 

Vertex Pharmaceuticals (VRTX) is a high-quality biotech with these characteristics. 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

One reason to favor biotech and pharmaceutical stocks in this environment is that their earnings prospects are less connected to factors like economic growth and monetary policy. 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 18 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 30% profit margins which are 2.5x 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 $302.57 per share on Tuesday morning, down $2.96 (-0.97%). Year-to-date, VRTX has gained 37.78%, versus a -9.33% rise in the benchmark S&P 500 index during the same period.

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.

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