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 Avanir Pharmaceuticals (Nasdaq: AVNR ) 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 Avanir Pharmaceuticals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.5%||Fail|
|1-Year Revenue Growth > 12%||390.6%||Pass|
|Margins||Gross Margin > 35%||95.2%||Pass|
|Net Margin > 15%||NM||NM|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||5.84||Pass|
|Opportunities||Return on Equity > 15%||(72.5%)||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 and negligible revenue. Total score = number of passes.
With a score of four, Avanir Pharmaceuticals isn't the perfect cure for your portfolio. The company has joined the elite group of biotechs with an approved drug, but so far, it hasn't led to the blockbuster that many had hoped for.
Avanir makes Nuedexta, a treatment for pseudobulbar affect, in which neurological diseases or brain injuries cause uncontrollable outbursts of crying or laughing. The company's stock doubled when the FDA approved the drug in late 2010.
But investors haven't been happy with Avanir's slow pace of sales after Nuedexta's launch. The problem is similar to ones that have plagued other companies. For instance, Dendreon's (Nasdaq: DNDN ) Provenge prostate cancer treatment got off to a bad start, due to a high price tag and some initial production problems. Similarly, Human Genome Sciences (Nasdaq: HGSI ) and GlaxoSmithKline (NYSE: GSK ) thought they had a hit on their hands with Benlysta, the first lupus treatment in more than 50 years. But as with pseudobulbar affect, lupus isn't life-threatening and therefore doesn't need immediate treatment.
In addition, the company drew congressional scrutiny last year over the relatively high pricing of the drug. Fool biotech specialist Brian Orelli argued that since Nuedexta is the only approved treatment for the disease, Avanir deserves its high price tag. But that won't stop some from responding that the price far exceeds Avanir's costs.
For Avanir to stay on its upward trajectory, it needs to build its sales of Nuedexta. Only by ramping up volume will Avanir reach profitability and get itself in position to 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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