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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 Immunomedics (Nasdaq: IMMU ) 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 Immunomedics.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||33.4%||Pass|
|1-Year Revenue Growth > 12%||122.8%||Pass|
|Margins||Gross Margin > 35%||43.0%||Pass|
|Net Margin > 15%||24.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||8.28||Pass|
|Opportunities||Return on Equity > 15%||26.2%||Pass|
|Valuation||Normalized P/E < 20||40.13||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Immunomedics last year, the stock has turned a corner, jumping four full points. The biopharma company saw huge growth that helped it become profitable, but the question is whether that growth can continue.
Immunomedics has commercially available products that allow doctors to detect certain types of bone infections or problematic anti-immune conditions. But the big product it has in development is epratuzumab, which could treat both lymphoma and lupus. When Human Genome Sciences (Nasdaq: HGSI ) and GlaxoSmithKline (NYSE: GSK ) got their Benlysta drug approved for lupus treatment, it presented another hurdle for epratuzumab.
That may one reason why Immunomedics reworked its collaboration with European partner UCB. Under the new arrangement, Immunomedics gave UCB the right to sublicense epratuzumab for U.S. sales in exchange for a $30 million upfront payment. The company will get another $30 million if UCB exercises its sublicensing right, and various milestone payments could bring it another $165 million. UCB also gets warrants to buy shares for $8, but with the stock trading at less than half that, the warrant deal doesn't seem like a highly dilutive provision.
Even if the drug is successful, though, it faces big competition. Not even considering Benlysta, Eli Lilly (NYSE: LLY ) , Teva Pharmaceuticals' (Nasdaq: TEVA ) Cephalon division, and AstraZeneca all have potential lupus treatments in their pipelines. Moreover, Benlysta sales haven't exactly taken off as much as many had hoped, suggesting that even effective drugs may not have the demand that investors expected.
With one-time payments boosting its top and bottom lines, Immunomedics may be having its closest brush with perfection. Without demonstrating more sustainable cash flow, Immunomedics could fall back into low-sales obscurity unless it can turn epratuzumab into a blockbuster.
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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