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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 Geron (Nasdaq: GERN ) 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 Geron.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(11.8%)||fail|
|1-Year Revenue Growth > 12%||84.4%||pass|
|Margins||Gross Margin > 35%||NM||fail|
|Net Margin > 15%||NM||fail|
|Balance Sheet||Debt to Equity < 50%||0%||pass|
|Current Ratio > 1.3||18.03||pass|
|Opportunities||Return on Equity > 15%||(41.7%)||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; Geron had negative gross and net profits over the periods measured. Total score = number of passes.
Geron's score of 3 leaves much to be desired. But the company is in a difficult specialty that's charged with political controversy.
Geron is a drug company and as such faces all the normal challenges that drugmakers have. It has no revenue to speak of right now, but it has a pipeline of drugs. For instance, its Imetelstat product to treat lung cancer patients is in phase 2 trials and has promise.
But where Geron focuses its attention is on stem-cell research, which explains the big swings in its stock. At issue is whether federal funding of the research is legal, which has caused huge fights that affect the entire industry. Along with Geron, StemCells (Nasdaq: STEM ) and Cytori Therapeutics (Nasdaq: CYTX ) have dealt with volatility as the legal challenges work their way through the courts.
With no sales, this stock is a roller coaster. When the first patient entered a Geron stem-cell clinical trial, shares soared. But earlier this week, when Geron announced a secondary stock offering to raise capital, the stock plunged.
Right now, Geron is a crapshoot. If its pipeline proves promising, then it will soar. Otherwise, the company will fade into obscurity. Despite the charged atmosphere surrounding stem-cell research, Geron remains a company without a blockbuster product, and until it can find one, it will never become the perfect stock.
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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