Is Illumina the Perfect Stock?

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 Illumina (Nasdaq: ILMN  ) 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 Illumina.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

48.6%

Pass

 

1-Year Revenue Growth > 12%

29.8%

Pass

Margins

Gross Margin > 35%

67.1%

Pass

 

Net Margin > 15%

10.6%

Fail

Balance Sheet

Debt to Equity < 50%

77.1%

Fail

 

Current Ratio > 1.3

5.06

Pass

Opportunities

Return on Equity > 15%

10.6%

Fail

Valuation

Normalized P/E < 20

39.51

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With four points, Illumina certainly hasn't healed all wounds for its investors. But the company still has some promising technology that could lead to a brighter future.

Illumina makes technology that companies use to study and analyze genomes. With genome sequencing becoming increasingly inexpensive and valuable -- the $1,000 mark for sequencing is on the verge of being broken -- Illumina and competitors like Pacific Biosciences of California (Nasdaq: PACB  ) and Roche are helping researchers facilitate their studies.

The problem, though, is that the company is facing big challenges on the revenue front. Early last month, Illumina guided fourth-quarter revenue estimates way downward and suspended full-year guidance. Illumina wasn't alone -- Affymetrix (Nasdaq: AFFX  ) and Life Technologies (Nasdaq: LIFE  ) have many of the same issues. But as long as budgets for the National Institutes of Health are up in the air, it's tough for researchers to spend money -- and that will hit Illumina's bottom line.

Last week, the company announced a partnership with Siemens (NYSE: SI  ) and its health-care division. Although some believe that Illumina is a takeover target, the company is still taking other steps to expand its independent operations, including its help in creating the New York Genome Center for genetic research.

At its current rich earnings multiple, investors clearly expect a lot from Illumina. For those who believe in Illumina's long-term prospects, the recent drop in its share price could serve as a great entry point. But those who want further proof may want to wait until Illumina gets a little closer to perfection.

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 Illumina to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Illumina and Pacific Biosciences of California. 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.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1584732, ~/Articles/ArticleHandler.aspx, 4/24/2014 5:35:03 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement