We recently compiled a list of the 7 Best Stocks to Invest in for Medium Term. In this article, we will look at where Thermo Fisher Scientific Inc. (NYSE:TMO) ranks among the best stocks to invest in for the medium term.
On September 18, the Federal Reserve reduced its policy rate by 50 basis points, lowering it to 4.75%–5.00% from 5.25%–5.50%. Following the announcement, stocks surged, with the broader market hitting a new intra-day all-time high and closing at its 39th record of 2024, marking the first since mid-July. The index has risen over 20% since the beginning of the year. The interest rate reduction has created new opportunities for investors, signaling a shift towards a more supportive monetary policy intended to boost economic activity. Lower interest rates generally result in reduced borrowing costs, encouraging both business expansion and consumer spending. This fosters a favorable environment, making medium-term investments, typically ranging from 3 to 5 years, more appealing.
To effectively execute this strategy, investors should evaluate several key factors in the companies they select. These include the stock’s performance over the past year, profitability, sales figures, debt levels, price-to-earnings ratio, and dividends. Additionally, assessing revenue growth and payout ratios can provide further insights.
Dividend stocks are often seen as good choices for medium-term investments, providing investors with passive income while they hold the stock. In addition, dividend-paying companies can be a smart investment during times of market volatility. A report by Hartford Funds showed that from 1940 to 2023, dividend income contributed an average of 34% to the total return of the broader market. The report also highlighted that in decades with total returns below 10%—such as the 1940s, 1960s, and 1970s—dividends made a significant impact on overall returns.
Dividend growth is the most favored approach within dividend investing, as it boosts investors’ income over time. Kirsten Cabacungan, an investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank, emphasized the significance of dividend growth strategies in investment planning. Here are some comments from the analyst:
“Generally, it’s larger, more mature companies that return capital to their shareholders in the form of dividends. Companies that have consistently increased their dividends tend to be more stable, higher quality businesses, which historically have weathered downturns and are more likely to have the ability to pay dividends consistently.”
A company’s dividend payout ratio is a crucial measure of its ability to maintain dividend flexibility. Firms that allocate most or all of their earnings to dividends may struggle under competitive pressure, as their cash flow might not be enough to sustain operations. A report by Nuveen highlighted that, historically, stocks with the highest payout ratios haven’t delivered the best long-term results. Instead, companies with moderate to moderately high payout ratios have tended to outperform over the past two decades among dividend-paying stocks. With this, we will now discuss some of the best stocks to buy for medium term.
Our Methodology:
For this list, we used a Finviz screener to to find dividend stocks with an average revenue growth of over 10% over the past five years, highlighting companies with consistent sales growth. From that selection, stocks with a five-year average payout ratio of under 40% were chosen, indicating a strong cash position. The final list includes 7 companies with the highest number of hedge fund investors, based on Insider Monkey’s Q2 2024 database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Thermo Fisher Scientific Inc. (NYSE:TMO)
Number of Hedge Fund Holders: 108
5-Year Average Annual Revenue Growth Rate: 11.23%
5-Year Average Payout Ratio: 7.47%
Thermo Fisher Scientific Inc. (NYSE:TMO) ranks fourth on our list of the best stocks to buy for medium term. The American biotech and life sciences company offers a wide range of related products and services to its consumers. The stock has risen by 14% since the beginning of 2024, consistently benefiting from its acquisition strategy. Recently, it finalized its acquisition of Olink, a provider of advanced proteomic solutions. This acquisition enhances the company’s capabilities and strengthens its leadership in protein research. It allows customers to significantly speed up discoveries and scientific breakthroughs while advancing the goals of precision medicine.
In the second quarter of 2024, Thermo Fisher Scientific Inc. (NYSE:TMO) reported revenue of $10.5 billion, which showed a slight decline of 1.3% from the same period last year. However, the revenue beat analysts’ estimates by $23.4 million. The company’s steadfast focus on research has established it as a leading entity in the eyes of analysts. Generation Investment Management also highlighted this in its Q4 2023 investor letter:
“In each quarterly letter we share examples from the portfolio that bring our investment process to life. This quarter we focus on Thermo Fisher Scientific Inc. (NYSE:TMO), a provider of healthcare products.
In recent years advances have accelerated. The large-scale use of mRNA vaccines during the COVID pandemic – the first major application of these vaccines – is just one example. Similar advances in drug development have allowed medicines to be developed for hard-to-treat diseases like Alzheimer’s, as well as to treat and perhaps cure diseases that previously eluded treatment.
To push innovation forward, researchers need tools to ask the right questions, run experiments to test hypotheses and in turn draw insights. These tools encompass high-specification instruments, high-purity reagents, powerful software and a variety of specialised services. An ecosystem has developed of companies that specialise in providing these tools. We often think of them as providing the ‘picks-and-shovels’ to researchers who are mining for the gold once obscured by nature…” (Click here to read the full text)
Thermo Fisher Scientific Inc. (NYSE:TMO)’s balance sheet is strong and has solid cash generation. In Q2 2024, the company reported an operating cash flow of $1.96 billion, up from $1.54 billion in the prior year period. Its free cash flow also grew to $1.7 billion, from $1.26 billion in the same period last year. On July 11, the company declared a quarterly dividend of $0.39 per share, which was in line with its previous dividend. The stock’s dividend yield on September 19 came in at 0.25%.
Thermo Fisher Scientific Inc. (NYSE:TMO) was a part of 108 hedge fund portfolios at the end of Q2 2024, compared with 110 in the previous quarter, as per Insider Monkey’s database. The stakes owned by these hedge funds have a total value of over $8.56 billion. Ken Fisher’s Fisher Asset Management was the company’s leading stakeholder in Q2.
Overall, TMO ranks 4th on our list of the best stocks to invest in for medium term. While we acknowledge the potential of TMO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TMO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.