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 Protalix BioTherapeutics (NYSE: PLX ) 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 Protalix BioTherapeutics.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||126.6%*||Pass|
|1-Year Revenue Growth > 12%||173.8%||Pass|
|Margins||Gross Margin > 35%||82.9%||Pass|
|Net Margin > 15%||(46%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||3.09||Pass|
|Opportunities||Return on Equity > 15%||(178.7%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes. *6 1/2 year growth rate.
With five points, Protalix BioTherapeutics gets into the middle of the pack. The stock's rise of about 20% over the past year masks a lot of volatility for the small biotech.
After years of waiting for developing drugs to move up the clinical trial chain, Protalix has finally started to see some revenue come in. After FDA delays related to its taliglucerase alfa for Gaucher disease in early 2011, Protalix and marketing partner Pfizer (NYSE: PFE ) had to get more information before the FDA would approve the drug. Then, back in December, the FDA further delayed a decision on the drug, sending Protalix's stock plunging. But in the end, the third time was the charm, and the drug, now called Elelyso, got approved in May.
But approval doesn't automatically mean riches for Protalix. The company faces competition from Sanofi's (NYSE: SNY ) Cerezyme, although supply constraints may keep Cerezyme from ramping up production until early next year. Moreover, Europe's drug regulatory agency chose not to recommend Elelyso for approval despite giving it a positive assessment back in June, because Shire Pharmaceuticals has a competing drug with 10-year exclusivity.
One possibility for Protalix is for it to get bought out. Pfizer is a logical candidate, but with Merck (NYSE: MRK ) and Eli Lilly (NYSE: LLY ) also looking to bolster their drug pipelines, even an orphan-drug specialist like Protalix might look attractive, with its PRX-105 in clinical trials and several other compounds at the preclinical stage.
For Protalix to improve, it needs to turn its newly found revenue into bottom-line profit. Until it can manage that, it's hard to see Protalix making much progress on the road 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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