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 Achillion Pharmaceuticals (Nasdaq: ACHN ) 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 Achillion Pharmaceuticals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(20.5%)||Fail|
|1-Year Revenue Growth > 12%||345.1%||Pass|
|Margins||Gross Margin > 35%||100%||Pass|
|Net Margin > 15%||NM||NM|
|Balance Sheet||Debt to Equity < 50%||0.5%||Pass|
|Current Ratio > 1.3||8.00||Pass|
|Opportunities||Return on Equity > 15%||(55.2%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 8|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings well in excess of total revenue. Total score = number of passes.
With four points, Achillion Pharmaceuticals has plenty of work left to do. But the biotech company is in a hot area of the market right now and is trying to unlock shareholder value through a potential acquisition.
Achillion has three drugs in clinical trials to treat hepatitis C. That's an area that has gotten a lot of attention recently, with Pharmasset (Nasdaq: VRUS ) partnering up with two bigger pharma companies, and Gilead Sciences (Nasdaq: GILD ) , Idenix Pharmaceuticals (Nasdaq: IDIX ) , and Inhibitex (Nasdaq: INHX ) all having drugs in development to treat the disease.
With combination treatments par for the course in treating hepatitis C, the idea of strategic mergers between players in the space seems obvious. That's likely the primary reason why Gilead decided to buy out Pharmasset earlier this week. Late last week, Achillion arguably jumped the gun by making a general and somewhat vague announcement that it was in talks with potential buyers for the company. Shares finished up 8% on the news, as investors apparently jumped on board in hopes of capturing a buyout premium even before an offer's on the table. Of course, with data from its phase 2 trials due in the next month and a half or so, no buyer is likely to surface until we find out if the drug actually works.
One positive thing going for Achillion is the fact that it has quite a bit of cash. Unlike some small biotechs that get starved for money, Achillion did a dilutive secondary offering earlier this year, raising more than $50 million.
To go up against major hepatitis C treatment makers like Vertex Pharmaceuticals (Nasdaq: VRTX ) , Achillion has to have its drug back up what its executives have been saying. If the ACH-1625 drug doesn't live up to expectations, Achillion will probably never get close to being 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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