Is Gilead Sciences the Perfect Stock?

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 Gilead Sciences (Nasdaq: GILD  ) 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 Gilead.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 34.9% pass
  1-Year Revenue Growth > 12% 24.6% pass
Margins Gross Margin > 35% 76.9% pass
  Net Margin > 15% 38.5% pass
Balance Sheet Debt to Equity < 50% 61% fail
  Current Ratio > 1.3 2.33 pass
Opportunities Return on Equity > 15% 54.2% pass
Valuation Normalized P/E < 20 12.67 pass
Dividends Current Yield > 2% 0% fail
  5-Year Dividend Growth > 10% 0% fail
       
  Total Score   7 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 7, Gilead makes a very respectable showing. To those who follow the biotech company, that shouldn't come as much of a surprise.

Gilead has a dominant position in the market for drugs that fight HIV. Its two top-selling HIV medications, Truvada and Atripla, have about 75% market share in the U.S. and more than 50% worldwide.

Yet Gilead's strength is also its long-term weakness. In the face of losing patent protection on Truvada and Atripla eventually, the company needs to come up with drugs that can replace them.

To do that, Gilead is working on two main fronts. It continues to develop HIV drugs, working with Johnson & Johnson (NYSE: JNJ  ) on combining a J&J drug with Truvada. But it's also diversifying into fighting hepatitis C, with several drugs in clinical development. With hepatitis C, other companies -- including Vertex Pharmaceuticals (Nasdaq: VRTX  ) and Merck (NYSE: MRK  ) -- have gotten a head start. But as it's shown with HIV, all Gilead has to do is develop a better drug, and if it can, sales should follow.

From an investor's standpoint, Gilead's lack of dividends is disappointing, but the company does do substantial buybacks with its cash. That seems to be par for the course among biotechs; peer Amgen (Nasdaq: AMGN  ) doesn't pay a dividend, either, despite impressive margins and returns on equity.

Gilead is an established company with solid products. If the company can make its future as lucrative as its past, then Gilead could easily become the perfect stock.

Keep searching
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.

Click here to add Gilead Sciences to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Gilead Sciences is a Motley Fool Stock Advisor selection. Vertex Pharmaceuticals is a Motley Fool Rule Breakers choice. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor pick. The Fool and Motley Fool Alpha both own shares of Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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