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 Cerus (Nasdaq: CERS ) 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 Cerus.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.6%||Fail|
|1-Year Revenue Growth > 12%||46.7%||Pass|
|Margins||Gross Margin > 35%||41.7%||Pass|
|Net Margin > 15%||(58.8%)||Fail|
|Balance Sheet||Debt to Equity < 50%||37.4%||Pass|
|Current Ratio > 1.3||1.70||Pass|
|Opportunities||Return on Equity > 15%||(107.8%)||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 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Cerus last year, the company has kept its four-point score. Its shares, though, have delivered a nice return of just less than 20% over the past year.
Cerus owes most of its success in the blood-transfusion safety industry to its Intercept Blood System, which it developed in conjunction with Baxter International (NYSE: BAX ) . The system targets and neutralizes potentially harmful viruses, bacteria, and parasites while leaving blood intact. Although the system hasn't gotten FDA approval for use in the U.S., European countries use the system, with Cerus having entered into an agreement earlier this year to supply France's national blood service for two years, as well as another recent contract with Russia's federal medical-biological agency.
Unfortunately, Cerus faces substantial competition even if it ever gets approved for U.S. use. Novartis (NYSE: NVS ) currently screens about 80% of the donated blood supply here, making a formidable adversary even if the FDA approves Intercept.
Moreover, if Cerus starts doing business in the U.S., it would potentially run into a new problem: the 2.3% excise tax on revenues from medical device sales. Although large device-makers Stryker (NYSE: SYK ) and Medtronic (NYSE: MDT ) , which stand to pay as much as $150 million in tax next year, would pay larger dollar amounts, Cerus and its small peers could find the tax even more disastrous to their tenuous financial state.
For Cerus to improve, it needs to find a way to break into the U.S. market as well as extending its reach throughout the world. If it can keep growing its revenue, it will eventually become profitable and get one step closer to 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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