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 ViroPharma (Nasdaq: VPHM ) 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 ViroPharma.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||27.1%||Pass|
|1-Year Revenue Growth > 12%||34.6%||Pass|
|Margins||Gross Margin > 35%||85.4%||Pass|
|Net Margin > 15%||27.3%||Pass|
|Balance Sheet||Debt to Equity < 50%||16.4%||Pass|
|Current Ratio > 1.3||7.44||Pass|
|Opportunities||Return on Equity > 15%||15.7%||Pass|
|Valuation||Normalized P/E < 20||11.00||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||8 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
ViroPharma comes close to perfection with eight points, lacking only a dividend. The pharmaceutical company has an impressive combination of growth and profitability.
Many small pharmaceutical companies struggle to reach profitability. That makes ViroPharma's track record of growth that much more impressive. Having bought the rights to the antibiotic drug Vancocin from Eli Lilly (NYSE: LLY ) in 2004, ViroPharma benefited for years from the fact that drugmakers Mylan (Nasdaq: MYL ) , Teva Pharmaceutical (Nasdaq: TEVA ) , and Novartis (NYSE: NVS ) didn't want to go to the hassle of running a clinical trial to develop a generic version of the drug. But a 2009 FDA ruling opened the door to generic competition without a clinical trial, threatening ViroPharma's cash cow.
Now, though, investors are looking to the future prospects of Cinryze, which treats hereditary angioedema. Although that disease only affects about 6,000 patients in the U.S., the drug's cost is around $350,000 annually -- giving the orphan drug the chance to move the needle significantly at a small company like ViroPharma. In fact, the company has had trouble ramping up production enough to meet demand, as the FDA wants more information before approving industrial scale manufacturing for the drug.
Despite those hiccups, insiders still believe that ViroPharma has plenty of potential. Just a couple weeks ago, one insider invested more than $4.1 million to buy shares. Given its attractive price for such a strong growth candidate, it's no wonder there's insider interest. If it can continue its path upward, ViroPharma could easily become a 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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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."