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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Pfizer (NYSE: PFE ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Pfizer.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||6.1%||fail|
|1-Year Revenue Growth > 12%||45.8%||pass|
|Margins||Gross Margin > 35%||77.4%||pass|
|Net Margin > 15%||9.2%||fail|
|Balance Sheet||Debt to Equity < 50%||50.1%||fail|
|Current Ratio > 1.3||2.07||pass|
|Opportunities||Return on Equity > 15%||10.9%||fail|
|Valuation||Normalized P/E < 20||15.18||pass|
|Dividends||Current Yield > 2%||4.1%||pass|
|5-Year Dividend Growth > 10%||(26.4%)||fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 5, Pfizer puts in a reasonable performance. But it has been through some difficult times lately and has more challenges to get through in the future.
Like fellow big pharma companies Merck (NYSE: MRK ) and Eli Lilly (NYSE: LLY ) , Pfizer's biggest challenge is in maintaining its pipeline. The company's Lipitor drug will lose patent protection in the near future, and replacing those revenues will be difficult. Pfizer has had a string of failures among drugs in development, although last month's success in a phase 2 trial of a psoriasis medicine may mean things are starting to turn around.
To further build its pipeline, Pfizer continues to look to acquisitions, but with a more strategic bent. It recently announced a buyout of King Pharmaceuticals (NYSE: KG ) , whose pain-relief drugs mesh well with current Pfizer offerings. Finding similar deals will be tough, but it could help allay investors' fears about Pfizer's future.
Pfizer will always be fighting off Teva Pharmaceutical (Nasdaq: TEVA ) and other generic-drug makers as its compounds go off patent. Although the company's dividend is strong now, shareholders have to remember when Pfizer chopped its payout in half following the Wyeth acquisition. Owning Pfizer stock is a bet on the company being able to sustain its leadership role in the pharmaceutical industry.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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