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 Regeneron Pharmaceuticals (Nasdaq: REGN ) 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 Regeneron Pharmaceuticals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||56.1%||Pass|
|1-Year Revenue Growth > 12%||20.9%||Pass|
|Margins||Gross Margin > 35%||1.8%||Fail|
|Net Margin > 15%||(29.5%)||Fail|
|Balance Sheet||Debt to Equity < 50%||87.5%||Fail|
|Current Ratio > 1.3||4.35||Pass|
|Opportunities||Return on Equity > 15%||(32.6%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Regeneron Pharmaceuticals last year, the company has lost a point. A big jump in debt is responsible for the drop, although shareholders certainly can't complain about the stock's having more than doubled in the past year.
Nothing's better for a biotech than when it launches a product, and that's exactly what happened with Regeneron late last year. Its macular degeneration drug Eylea started selling at the end of November.
Despite the importance of getting drugs approved, what trips up many companies is having to market and sell those drugs after receiving approval. Dendreon (Nasdaq: DNDN ) has struggled even after its cancer treatment Provenge got approved because getting doctors to use it has proven challenging. Similarly, Human Genome Sciences (Nasdaq: HGSI ) and GlaxoSmithKline (NYSE: GSK ) figured they had a big hit with lupus drug Benlysta, which was the first drug in 50 years to receive approval to treat the disease. Yet doctors have been slow to prescribe Benlysta, leading to relatively slow sales growth.
But Eylea has turned out to be a blockbuster hit, with sales much greater than what analysts had originally expected. The company doubled its original revenue guidance for the year based on the big increase in Eylea sales.
Moreover, Regeneron has other drugs in its pipeline. Between gout treatment Arcalyst, which is under FDA review, and colorectal cancer drug Zaltrap, Regeneron has some promising irons in the fire for future development. Moreover, its partnership with Sanofi (NYSE: SNY ) could produce even more hits.
For Regeneron to improve, it just needs time to let Eylea sales boost its bottom line. If its other drugs succeed, then expect Regeneron to move a lot closer to perfection in the near future.
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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