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 Mylan (Nasdaq: MYL ) 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 Mylan.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||32.5%||Pass|
|1-Year Revenue Growth > 12%||12.5%||Pass|
|Margins||Gross Margin > 35%||41.8%||Pass|
|Net Margin > 15%||8.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||151.1%||Fail|
|Current Ratio > 1.3||1.39||Pass|
|Opportunities||Return on Equity > 15%||15.1%||Pass|
|Valuation||Normalized P/E < 20||22.67||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Mylan last year, the company has seen its score rise by two points. Better returns on equity and stronger growth bode well for the stock going forward.
As a producer of generic pharmaceuticals, Mylan is benefiting from the big group of brand-name drugs that have lost or are about to lose patent protection. For instance, Mylan makes generic versions of Pfizer's (NYSE: PFE ) glaucoma drug Xalatan and fungal fighter Vfend, as well as AstraZeneca's (NYSE: AZN ) Entocort. Mylan doesn't boast as big a portfolio of drugs as industry giant Teva Pharmaceutical (Nasdaq: TEVA ) does, but analysts see it growing at a faster pace than Teva.
One interesting aspect of the industry is how its two giants have divided the world market. Mylan has had much greater success in the North American market than Teva, but Teva has seen a huge increase in European sales, where Mylan has struggled.
An increasingly competitive area of potential growth comes from biosimilars -- the biotech equivalent of generic drug compounds. Creating biosimilars is more complicated than regular generic drugs, which is one reason why companies like Mylan are pairing up to try to boost production. Mylan was somewhat late to the game back in 2009, setting up a partnership with India's Biocon well after Teva was doing its own groundwork. More recently, Amgen (Nasdaq: AMGN ) and several of its peers have done similar collaborations.
For Mylan to keep seeing improvement, it needs to take maximum advantage of the patent cliffs facing big pharma stocks over the next several years. By capturing its share of new generics, Mylan can assure itself of the growth that investors expect.
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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