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 Savient Pharmaceuticals (Nasdaq: SVNT ) 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 Savient.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(42.9%)||fail|
|1-Year Revenue Growth > 12%||23.1%||pass|
|Margins||Gross Margin > 35%||65.2%||pass|
|Net Margin > 15%||NM||fail|
|Balance Sheet||Debt to Equity < 50%||0%||pass|
|Current Ratio > 1.3||1.15||fail|
|Opportunities||Return on Equity > 15%||(1,975%)||fail|
|Valuation||Normalized P/E < 20||NM||fail|
|Dividends||Current Yield > 2%||0%||fail|
|5-Year Dividend Growth > 10%||0%||fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Savient had negative earnings and negligible revenue during the period. Total score = number of passes.
Among the universe of stocks, Savient's score of 3 isn't very impressive. But even if Savient isn't a great stock yet, some see the potential for it to become one in the future.
For years, Savient has suffered the ups and downs of being a small biotech stock. Its main focus has been a single drug, Krystexxa, which helps treat chronic gout. Last year, an FDA advisory panel recommended the drug, sending shares soaring. Shortly thereafter, though, the FDA rejected Krystexxa, citing side effects and manufacturing process concerns. Only in September was the FDA finally satisfied with Savient's responses and approved the drug.
Now, it's time for the company to make good on its potential. The question is how best to do that. As essentially a one-drug company, fellow Fool Brian Orelli thinks Savient is a perfect takeover candidate, with Amgen (Nasdaq: AMGN ) , Pfizer (NYSE: PFE ) , and Abbott Labs (NYSE: ABT ) among the obvious contenders. Another option would be to partner up with a larger company that's better able to market the drug.
Either way, it's clear that Savient's financials soon won't look anything like its past numbers. Whether it survives as an independent company or gets taken out, Savient looks like it may have a bright future ahead.
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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