Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Momenta Pharmaceuticals (Nasdaq: MNTA ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Momenta Pharmaceuticals.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||74.7%||Pass|
|1-Year Revenue Growth > 12%||858.7%||Pass|
|Margins||Gross Margin > 35%||100.0%||Pass|
|Net Margin > 15%||57.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.6%||Pass|
|Current Ratio > 1.3||18.97||Pass|
|Opportunities||Return on Equity > 15%||63.4%||Pass|
|Valuation||Normalized P/E < 20||12.93||Pass|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||8 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 8, Momenta Pharmaceuticals falls just shy of perfection. The biotech is soaring on a wave of recent success, but the question still remains where the company goes from here.
Last summer, Momenta got long-awaited good news: the FDA had approved its generic version of Sanofi's (NYSE: SNY ) Lovenox, a billion-dollar blockbuster drug that had been a core part of Sanfoi's success. With help from Novartis (NYSE: NVS ) , Momenta's commercialization partner, Momenta quickly launched the generic and saw revenue soar from $16 million in the second quarter of 2010 to $191 million in 2011's first quarter.
How long the good times will last, though, remains to be seen. Most of Momenta's momentum comes from the fact that it has the only competitor to Lovenox and is therefore able to sell its version at a price close to the original. But with other generic versions possibly coming from Teva Pharmaceutical (Nasdaq: TEVA ) as well as a partnership between Amphastar Pharmaceuticals and Watson Pharmaceuticals (NYSE: WPI ) , Momenta's impressive margins could contract in a hurry.
With shares trading at around $19, it's clear that shareholders aren't counting on earnings per share of more than $2 per quarter lasting very long. But even when the inevitable competition comes, Momenta may still have good earning potential for venturesome investors.
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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