Has Achillion Pharmaceuticals 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 Achillion Pharmaceuticals (Nasdaq: ACHN  ) 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 a 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 Achillion Pharmaceuticals.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

12.4%

Fail

 

1-Year Revenue Growth > 12%

16.5%

Pass

Margins

Gross Margin > 35%

100%

Pass

 

Net Margin > 15%

NM

NM

Balance Sheet

Debt to Equity < 50%

1%

Pass

 

Current Ratio > 1.3

6.56

Pass

Opportunities

Return on Equity > 15%

(59%)

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 8

Source: S&P Capital IQ. NM = not meaningful due to negative earnings and insignificant total revenue. Total score = number of passes.

Since we looked at Achillion Pharmaceuticals last year, the company has kept its four-point score. The shares have gone on a roller-coaster ride, with a 20% gain over the past year masking much bigger temporary jumps in the stock.

Achillion has had a tumultuous year, due mostly to its developmental drugs in the red-hot hepatitis C drug industry. Early in the year, Achillion soared when Bristol-Myers Squibb (NYSE: BMY  ) paid a huge premium to buy fellow hep-C researcher Inhibitex on the heels of Gilead Sciences' (Nasdaq: GILD  ) much larger purchase of Pharmasset.

Yet, in April, Achillion got bad news: its ACH-1625 drug, while showing strong efficacy in phase 2 clinical data, took longer than rival Gilead's GS-7977. Although Achillion followed that up with strong phase 1b data for another drug, ACH-2684, many investors feared that the company would miss out on the gold rush toward better hep-C treatments, as both Gilead and Abbott Labs (NYSE: ABT  ) have multiple drugs ready for phase 3 trials.

A couple of months ago, Achillion showed solid gains when Bristol-Myers and Idenix Pharmaceuticals (Nasdaq: IDIX  ) ran into safety issues, with a Bristol drug being completely discontinued, while Idenix had two trials halted indefinitely. But, again, Achillion has largely given up those gains since, as Gilead has such a substantial lead in bringing products to market that Achillion may never be able to catch up.

For Achillion to improve, it needs to keep working on its trials and, hopefully, get more positive results. In the end, a buyout may be Achillion's best chance to reach a perfect result for investors, but it could still be a long way off.

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.

As interesting as Achillion is, Abbott Labs seems to be closer to hep-C success. But the impending spinoff of Abbott's branded-drug business is a confusing event to understand, with many investors left wondering what to do with these two stocks once they're separated. To help investors better understand the upcoming event, the Fool has created a brand new premium report outlining both Abbott Labs and its spinoff, AbbVie. Inside, we outline all of the must-know opportunities and risks facing both companies, so make sure to claim this 2-for-1 report by clicking here now

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


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