Has Illumina Become the Perfect Stock?

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 Illumina (Nasdaq: ILMN  ) 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 Illumina.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

28.2%

Pass

 

1-Year Revenue Growth > 12%

2.1%

Fail

Margins

Gross Margin > 35%

69.1%

Pass

 

Net Margin > 15%

8.4%

Fail

Balance Sheet

Debt to Equity < 50%

68.2%

Fail

 

Current Ratio > 1.3

5.43

Pass

Opportunities

Return on Equity > 15%

8.1%

Fail

Valuation

Normalized P/E < 20

48.82

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Illumina last year, the company has dropped a point, with revenue growth decelerating sharply. That hasn't held the stock back, though, which has posted a nearly 60% gain over the past year.

Illumina is the established leader in genomics and DNA sequencing technology. After rival Life Technologies (Nasdaq: LIFE  ) came out with its $1,000 genome sequencer, though, Illumina took to the offensive, boosting research and development outlays to come out with its own $1,000 genome product and leaving smaller Complete Genomics (Nasdaq: GNOM  ) and Pacific Biosciences (Nasdaq: PACB  ) trying to play catch-up.

Earlier in the year, Roche sought to buy out Illumina with a series of bids that could only be described as lowball. After a sequence of bids that started at $40 per share and rose steadily to $51, Roche failed to come up with board seats in a proxy battle and therefore backed away from its takeover attempt.

Illumina has also used partnerships to gain revenue. For instance, Sequenom (Nasdaq: SQNM  ) relies on Illumina's technology for its MaterniT21 testing service, which is Sequenom's most promising product offering.

In its most recent quarter, Illumina saw sales rise 21% on a 50% jump in GAAP earnings. It also kept revenue and net income guidance in line with previous projections.

For Illumina to improve, it needs to find more applications for its genome equipment and seek ways to extend its edge over competitors. If it succeeds, Illumina could move closer to perfection quickly.

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.

While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Click here to add Illumina to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Illumina. Motley Fool newsletter services recommend Illumina and Pacific Biosciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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