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 Allos Therapeutics
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 Allos Therapeutics.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | NM | NM |
| 1-Year Revenue Growth > 12% | 97.8% | Pass | |
| Margins | Gross Margin > 35% | 77.7% | Pass |
| Net Margin > 15% | (34.8%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 0% | Pass |
| Current Ratio > 1.3 | 5.32 | Pass | |
| Opportunities | Return on Equity > 15% | (33.8%) | 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 8 |
Source: S&P Capital IQ. NM = not meaningful; Allos had no revenue five years ago and negative earnings over the past 12 months. Total score = number of passes.
Since we looked at Allos Therapeutics last year, the company has kept its four-point score. With a tender offer on the table, though, it appears that shareholders may not be able to wait much longer for Allos to try to reach perfection.
Allos is an example of a stock that managed to navigate its way through FDA approval for a drug but still didn't turn into a huge success. The company's Folotyn treatment for a rare form of lymphoma had some promise, but sales have disappointed investors, and competition has kept Allos from vaulting higher.
Because of its difficult situation, Allos has spent much of the past year looking at options for partnerships. About a year ago, Allos agreed to merge with AMAG Pharmaceuticals
Still, shareholders may be balking at the deal. The companies have had to extend Spectrum's tender offer for Allos shares several times, with the current deadline of July 23. So far, only about 60% of shares have been tendered.
Barring a big setback on the merger front, Allos is likely to disappear into the fold of its acquirer. That's probably a good thing, as it's unlikely the company could have reached perfection on its own.
Keep searching
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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