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 Teva Pharmaceutical (Nasdaq: TEVA ) 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 Teva Pharmaceutical.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||17.4%||Pass|
|1-Year Revenue Growth > 12%||18.6%||Pass|
|Margins||Gross Margin > 35%||53.6%||Pass|
|Net Margin > 15%||15.6%||Pass|
|Balance Sheet||Debt to Equity < 50%||61.4%||Fail|
|Current Ratio > 1.3||1.42||Pass|
|Opportunities||Return on Equity > 15%||13.5%||Fail|
|Valuation||Normalized P/E < 20||13.31||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||22.5%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Teva Pharmaceutical last year, the company has hung onto its eight-point score. Yet the stock has only managed about a 10% gain over the past year.
Teva offers investors the best of both worlds in the pharmaceutical space. On one hand, it's a leader in generic drug manufacturing, benefiting from the huge array of drugs across the space that already have or are about to lose patent protection. But it also has its own proprietary drugs, most notably Copaxone, which makes up 20% of Teva's entire revenue.
But the company has gone through some upheaval in the past year. Back in April, Teva considered dropping its branded drug segment, instead relying on its ability to outcompete generic-makers. Admittedly, Copaxone faces competition from similar drugs from Pfizer (NYSE: PFE ) and the Biogen Idec and Elan (NYSE: ELN ) partnership that created Tysabri. Moreover, generic competitors Momenta Pharmaceuticals (Nasdaq: MNTA ) and Mylan have said that they expect to create generic versions of Copaxone when they can. Still, with the growth potential from branded drugs, Fool contributor and pharma expert Brian Orelli believes getting rid of them would be a big mistake.
For Teva to improve, it needs only to make modest progress in reducing debt on its balance sheet and boosting its returns on equity to a minimal extent. If it can succeed in doing so, then Teva could become a perfect stock within a year or two.
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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