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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 Momenta Pharmaceuticals (Nasdaq: MNTA ) 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 Momenta Pharmaceuticals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||70.9%||Pass|
|1-Year Revenue Growth > 12%||19.8%||Pass|
|Margins||Gross Margin > 35%||100%||Pass|
|Net Margin > 15%||51.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||18.84||Pass|
|Opportunities||Return on Equity > 15%||35.5%||Pass|
|Valuation||Normalized P/E < 20||9.51||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Momenta Pharmaceuticals last year, the company had the same eight-point score. But the biotech's stock has performed badly over the past year, raising questions about how the company will succeed going forward.
Momenta depends on the success of its partnership with Novartis (NYSE: NVS ) to sell a generic version of Sanofi's (NYSE: SNY ) Lovenox for its primary source of revenue. As long as its generic is the only one available, it has a lucrative stream of income from its sales.
But on numerous occasions over the past year, Momenta has seen threats to that exclusivity. In September, reports came out that the FDA had approved a rival generic from Amphastar Pharmaceuticals and Watson Pharmaceuticals (NYSE: WPI ) . Repeating a tactic it had previously used with Teva Pharmaceutical (Nasdaq: TEVA ) , Momenta went to court to have a restraining order put on the pair to keep them from selling their generic version. But then in October, Sanofi itself chose to do an authorized generic of the drug, sending Momenta shares plunging once more.
Looking forward, Momenta expects losses as its Lovenox arrangement with Novartis will now be a much less lucrative royalty stream rather than a share of profits. Momenta will replace a small amount of its revenue through an agreement with Baxter (NYSE: BAX ) to develop biosimilars, but a $33 million upfront payment won't put a big dent into the loss of much larger past revenue from generic Lovenox. More interesting is its attempt to launch a generic version of Teva's Copaxone, which could again send its sales higher.
Momenta is going through a big change, and its future depends on success in its planned follow-up ventures to the fading Lovenox opportunity. If Momenta can't get approval of its Copaxone generic, it could see itself move much further away from perfection.
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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