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 Alexion Pharmaceuticals
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 Alexion Pharmaceuticals.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 233.2% | Pass |
| 1-Year Revenue Growth > 12% | 42.2% | Pass | |
| Margins | Gross Margin > 35% | 74% | Pass |
| Net Margin > 15% | 17.8% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 0% | Pass |
| Current Ratio > 1.3 | 3.73 | Pass | |
| Opportunities | Return on Equity > 15% | 13.3% | Fail |
| Valuation | Normalized P/E < 20 | 91.53 | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 6 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, Alexion Pharmaceuticals isn't perfect. But the small biotech may have the cure for an ailing portfolio, thanks to an unusually profitable business model.
When you look at Alexion, the first thing that stands out is that it's an unusual biotech company in one respect: it's profitable. The company can thank its only marketed drug, Soliris, for those profits. The drug was approved in 2007 for a rare blood disorder that affects fewer than 10,000 people in the U.S. and Europe.
That might not sound like a recipe for success, but with what's known as orphan drug status, companies like Alexion, as well as GlaxoSmithKline
The big question is what will come next for the company. So far, Alexion is simply milking Soliris for everything it's worth. But the biotech bought start-up and potential competitor Taligen Therapeutics earlier this year, which should help Alexion's pipeline.
Alexion may not be perfect, but in the biotech space, it's a rarity. If you want biotech exposure with significant growth prospects and a proven history of profitability, Alexion is definitely worth a closer look.
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.
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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."
