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 Seattle Genetics (Nasdaq: SGEN ) 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 Seattle Genetics.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||60.7%||Pass|
|1-Year Revenue Growth > 12%||78.8%||Pass|
|Margins||Gross Margin > 35%||(34.2%)||Fail|
|Net Margin > 15%||(100.6%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||5.23||Pass|
|Opportunities||Return on Equity > 15%||(50.2%)||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 Seattle Genetics last year, the company has picked up a point. Revenue is now back moving in the right direction, but even though the shares are up almost 30% over the past year, the biotech still isn't making a profit.
The best news any biotech company can get is to have a drug approved, and Seattle Genetics got over that hurdle with the FDA's approval of its Adcetris lymphoma treatment. With the cost of Adcetris expected to be around $108,000 per patient, the jump in the company's revenue is no surprise whatsoever.
But unfortunately, with just $33 million to $35 million in quarterly sales for the drug in the past two quarters, Adcetris isn't taking off the way Seattle Genetics had hoped. That's not an uncommon problem with high-priced treatments; Dendreon (Nasdaq: DNDN ) missed its initial sales guidance on its Provenge prostate cancer drug due to Medicare and insurance reimbursement issues that dissuaded doctors from taking the risk of prescribing the drug.
Much of Seattle Genetics' promise, though, comes from collaborations with other companies involving its antibody drug conjugate technology. With partnerships with Pfizer (NYSE: PFE ) , AstraZeneca (NYSE: AZN ) , and Abbott Labs (NYSE: ABT ) among many others, successful drugs using the technology could not only benefit those big pharma companies but also make nice surprises for Seattle Genetics in the form of milestone payments down the road.
For Seattle Genetics to improve, it needs Adcetris to reach its full potential. Unless that happens, the company will struggle even to reach profitability, let alone become a perfect stock.
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 the best investments from the rest.
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