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 Bristol-Myers Squibb
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 Bristol-Myers Squibb.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 5.6% | Fail |
| 1-Year Revenue Growth > 12% | 9.0% | Fail | |
| Margins | Gross Margin > 35% | 74% | Pass |
| Net Margin > 15% | 17.5% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 34.6% | Pass |
| Current Ratio > 1.3 | 1.97 | Pass | |
| Opportunities | Return on Equity > 15% | 33.4% | Pass |
| Valuation | Normalized P/E < 20 | 11.95 | Pass |
| Dividends | Current Yield > 2% | 4.2% | Pass |
| 5-Year Dividend Growth > 10% | 3.5% | Fail | |
| Total Score | 7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Bristol-Myers Squibb last year, the drugmaker has kept the same seven-point score. Yet the company is another year closer to losing patent protection on one of its biggest drugs.
Bristol's big product is Plavix, which is a blood thinner that it sells with Sanofi
In order to counter the loss of Plavix revenue, Bristol has acted aggressively to bolster its pipeline. Early last year, the company got approval for its Yervoy melanoma treatment, whose high price tag could bolster sales significantly. Moreover, it looks likely that Eliquis, the atrial fibrillation treatment it developed with Pfizer
In even bigger news, Bristol bought out hepatitis-C drugmaker Inhibitex in a $2.5 billion deal. Coming on the heels of Gilead Sciences'
For Bristol to keep improving, it will need to use these new drugs and others to boost its revenue further. But with a reasonable valuation and an attractive dividend yield, Bristol certainly has the capacity to become a perfect stock.
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 the best investments from the rest.
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