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 Halozyme (Nasdaq: HALO ) 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 Halozyme.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||124.6%||Pass|
|1-Year Revenue Growth > 12%||311.7%||Pass|
|Margins||Gross Margin > 35%||99.5%||Pass|
|Net Margin > 15%||(35.2%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||3.70||Pass|
|Opportunities||Return on Equity > 15%||(126.5%)||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.
With five points, Halozyme seems closer to perfection than it actually is. The stock has been a highflier lately, raising concerns that the company is getting ahead of itself.
Halozyme is a biopharmaceutical company that has a promising pipeline. Last summer, the company got the attention of investors when it announced huge revenue growth resulting from ViroPharma (Nasdaq: VPHM ) and Baxter International (NYSE: BAX ) having licensed its enzyme technology. Then, later last year, Halozyme's breast cancer drug Herceptin reported favorable phase 3 trial results, helping to push the stock further into the limelight. Furthermore, the company has the support of insiders, with some big purchases last summer having resulted in big profits.
Yet just earlier this week, Halozyme's stock plunged after a Jefferies analyst downgraded the stock. Yet for the most part, the analyst's primary argument was that the shares were overpriced, suggesting that the current price already reflects any reasonable good news that's likely to come in the near future. Moreover, Halozyme did a secondary offering to raise about $83 million in capital at a price just below where the stock now trades after the decline. Peers Dendreon (Nasdaq: DNDN ) and Vertex Pharmaceuticals (Nasdaq: VRTX ) both issued similarly dilutive secondary offerings in their day, using big price spikes to cash in while the time was right, and those offerings often killed momentum in the stock, at least in the short run.
For Halozyme to keep improving, it needs to get past licensing revenue to create a blockbuster drug of its own. If Herceptin proves to be that drug, then Halozyme could move toward perfection in a hurry.
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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