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 Ariad Pharmaceuticals (Nasdaq: ARIA ) 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 Ariad Pharmaceuticals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||96.8%||Pass|
|1-Year Revenue Growth > 12%||(85.7%)||Fail|
|Margins||Gross Margin > 35%||100%||Pass|
|Net Margin > 15%||NM||NM|
|Balance Sheet||Debt to Equity < 50%||4.8%||Pass|
|Current Ratio > 1.3||9.96||Pass|
|Opportunities||Return on Equity > 15%||(91.5%)||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 substantial net losses. Total score = number of passes.
Since we looked at Ariad Pharmaceuticals last year, the company's score has fallen by three points. Huge drops in revenue from licensing and collaboration along with profitability hurt Ariad, yet despite a recent setback, investors still seem hopeful about its prospects going forward.
Ordinarily, when a company's lead drug gets bad news, you can count on its stock plunging. Yet that didn't happen to Ariad when its ridaforolimus sarcoma drug, which it co-developed with Merck (NYSE: MRK ) , suffered a 13-to-1 vote from an FDA advisory panel recommending that the regulatory agency not approve the drug.
But investors are apparently still very hopeful about another drug Ariad has, ponatinib, which treats leukemia. Although the drug is only at the phase 2 trial stage, ponatinib has helped many patients for whom competing drugs from Novartis (NYSE: NVS ) and Bristol-Myers Squibb (NYSE: BMY ) either don't work or aren't viable treatments.
Still, Ariad is working against the clock. With expensive ongoing clinical trials, the failure of ridaforolimus has further delayed any drug-related sales coming in. Eventually, the company may have to issue stock for financing -- something that would almost certainly dilute existing shareholders.
To improve, Ariad needs to push one of its drugs through the approval process. Until that happens, it's not likely that Ariad is going to look like a perfect stock anytime soon.
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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