Motley Fool: Products people can’t do without

Vertex Pharmaceuticals (Nasdaq: VRTX) markets therapies that people can’t do without. Even better: It doesn’t have any competition. There are no approved drugs that treat the underlying cause of cystic fibrosis aside from the four produced by Vertex.

This near-certainty of revenue, regardless of how the economy performs, makes Vertex largely recession-proof. But the stock should deliver impressive returns even if a recession doesn’t arrive. In addition, Vertex thinks that it could have five new product launches over the next five years.

All eyes right now are on exa-cel, a gene-editing therapy that awaits regulatory approvals for use in two conditions – sickle cell disease and transfusion-dependent beta-thalassemia. Next year, Vertex could also file for approval of non-opioid acute-pain drug VX-548, and a new triple-drug cystic fibrosis combo.

That’s not all, though. Vertex’s pipeline also features inaxaplin, which is in a pivotal trial for treating APOL1-mediated kidney disease. In addition, the company has a promising treatment that could potentially cure Type 1 diabetes, now in early-stage testing.

With its strong cystic fibrosis franchise and multiple shots on goal, Vertex seems poised to be a strong performer over the long term. (The Motley Fool owns shares of and has recommended Vertex Pharmaceuticals.)

Ask the Fool

Q. Why don’t some companies pay dividends? Should I avoid such companies? – S.P., Opelika, Alabama

A. When companies earn money, they can spend it paying down debt, reinvesting in the business or paying a dividend – among other options. Younger, smaller companies typically want to use all the money they can to further their growth, and their earnings may not be consistent enough for them to commit to a dividend. Plenty of large companies – such as Tesla, Netflix and PayPal – also don’t pay dividends.

Dividends can help your portfolio grow, but you can also profit from dividendless stocks, if they’re tied to strong and growing companies whose stock increases in value over time.

Q. What’s a leveraged buyout? – T.C., Mansfield, Ohio

A. Often referred to as an LBO, a leveraged buyout is when one company buys another, doing so with a lot of borrowed money and very little of its own money – often just 20% to 30% of the purchase price, though it can be as little as 10%. (Investments made using a lot of debt can enjoy amplified gains, but there’s a risk of amplified losses, too.)

The acquired company may be taken “private,” meaning that it will no longer trade as a stock on the open market. Then the new owners may cut costs, perhaps by selling off some assets or laying off part of the workforce, before bringing the company public again. The new owners may also just split up the company, spinning off various businesses.

LBOs aren’t always welcomed by their targets and don’t always end well for the company or its shareholders – there are substantial interest payments due, after all, and morale can be low. Acquirers, though, often profit.

My smartest investment

I think my smartest investment happened many years ago, when I sold my shares in companies such as Kmart, Philip Morris and Columbia/HCA at a small loss and moved all the proceeds into Sun Microsystems. I doubled my money in about the first three months! – M.S., Mission, Kansas

The Fool responds: That definitely turned out to be a solid move.

Looking back now, Kmart merged with Sears in 2004, and Sears Holdings filed for bankruptcy protection in 2018. Meanwhile, in 2000, Columbia/HCA agreed to plead guilty to defrauding Medicare and Medicaid; the fines and damages totaled $1.7 billion – one of the largest health care fraud settlements in United States history. Now called HCA Healthcare, it’s chugging along. So is Philip Morris, though challenged by declining global cigarette smoking rates.

We do wonder how long you held on to your Sun Microsystems stock, because it ended up struggling in the 2000s, in part because of the rise of open source software. It was bought by Oracle in 2010 for $7.2 billion, in a deal that was later described by some as one of the worst acquisitions in history.

If you had lost faith in the stocks you sold, selling them was the right move. So was buying into Sun Microsystems, if you had great faith in it. We hope that you followed its progress and sold your shares (preserving your gains) when signs of trouble emerged.