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 Sequenom (Nasdaq: SQNM ) 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 Sequenom.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||16.7%||Pass|
|1-Year Revenue Growth > 12%||21.8%||Pass|
|Margins||Gross Margin > 35%||62.8%||Pass|
|Net Margin > 15%||(136.6%)||Fail|
|Balance Sheet||Debt to Equity < 50%||10.9%||Pass|
|Current Ratio > 1.3||4.38||Pass|
|Opportunities||Return on Equity > 15%||(106.6%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Sequenom last year, the biotech has picked up a point, thanks to improvement in its current ratio. More impressive, though, is the company's revenue growth over the past year, although profitability still remains a dream.
Sequenom's future depends in large part on its MaterniT21 LDT test for Down syndrome. The company got crushed in 2009 after news that employees had mishandled test data forced it to throw out all of its promising clinical data. After getting help recently from Illumina (Nasdaq: ILMN ) , however, Sequenom got new data that led to its launching the test commercially last October.
So far, though, the company hasn't yet provided direct sales figures. Instead, it has only suggested that a number of high-profile health-care providers have ordered the test.
Despite Sequenom having the benefits of actually having a product available to sell, investors need to face the possibility that sales won't go as well as expected. Dendreon (Nasdaq: DNDN ) has sent its shares on a similar roller-coaster ride after its promising Provenge cancer treatment gained approval but got off to a slow start in booking actual sales.
For investors, the worst news is that the company raised capital last week, selling 13 million shares at just $4.15 per share. Given that the stock is already down sharply over the past year, further dilution was the last thing investors wanted to see.
For Sequenom to reach perfection, it simply needs to do one thing: make MaterniT21 LDT a hit. The easiest way to do that would be to get FDA approval for MaterniT21, as that would allow LabCorp (NYSE: LH ) and Quest Diagnostics (NYSE: DGX ) to run the test. Anything less is likely to push Sequenom's stock to the bottom of the barrel.
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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