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 and then decide whether Novo Nordisk (NYSE: NVO ) 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.
- Moneymaking 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 Novo Nordisk.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.2%||Fail|
|1-Year Revenue Growth > 12%||13.4%||Pass|
|Margins||Gross Margin > 35%||81.6%||Pass|
|Net Margin > 15%||26.3%||Pass|
|Balance Sheet||Debt to Equity < 50%||2.8%||Pass|
|Current Ratio > 1.3||1.51||Pass|
|Opportunities||Return on Equity > 15%||55.3%||Pass|
|Valuation||Normalized P/E < 20||33.81||Fail|
|Dividends||Current Yield > 2%||1.5%||Fail|
|5-Year Dividend Growth > 10%||32%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With 7 points, Novo Nordisk looks pretty healthy. Certainly, shareholders agree, with the stock having jumped nearly 60% in the past year.
Novo is a pharmaceutical stock with a key focus on treating diabetes. As the incidence of diabetes has risen in the U.S. and elsewhere, Novo's insulin and blood-sugar drugs have become market leaders.
That doesn't mean Novo has had a free ride, though. Amylin, which Bristol-Myers Squibb (NYSE: BMY ) bought this summer, got FDA approval for Bydureon, a drug that requires only weekly injections rather than the daily injections that Novo's Victoza requires. Moreover, MannKind (Nasdaq: MNKD ) is still fighting for approval on its inhaled insulin product Afreeza. If approved, Afreeza could do away with injections entirely for many diabetics, a Holy Grail in diabetes research that eluded giants Pfizer (NYSE: PFE ) and Eli Lilly (NYSE: LLY ) as well as Novo.
Lately, Novo has suffered from the European financial crisis, as investors have steered away from European stocks regardless of their particular exposure to the Continent. Novo gets less than 30% of its revenue from Europe, though, with North America and other international operations drawing the lion's share of its sales.
For Novo to improve, it needs to keep working on ways to cement its place within the diabetes and insulin spaces. Whether that means buying out potential competitors like MannKind or coming up with new developments on its own remains to be seen, but if it can succeed in either of those directions, it could go a long way toward helping the company get closer to perfection in the years ahead.
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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