Is Celgene 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 Celgene (Nasdaq: CELG  ) 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 Celgene.

Factor What We Want to See Actual Pass or Fail?
Growth 5-year annual revenue growth > 15% 46.5% Pass
  1-year revenue growth > 12% 34.8% Pass
Margins Gross margin > 35% 92.5% Pass
  Net margin > 15% 24.3% Pass
Balance Sheet Debt to equity < 50% 21.2% Pass
  Current ratio > 1.3 4.06 Pass
Opportunities Return on equity > 15% 16.9% Pass
Valuation Normalized P/E < 20 35.28 Fail
Dividends Current yield > 2% 0.0% Fail
  5-year dividend growth > 10% 0.0% Fail
       
  Total Score   7 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With a score of seven, Celgene puts in an impressive showing. The big biotech has shown plenty of strength in recent years, but it still needs future success to continue its quest for perfection.

Much of Celgene's success comes from its cancer drug Revlimid. Despite recent concerns that the drug may increase the incidence of secondary cancers, the drug still accounts for 70% of the company's revenue.

With competitor Genzyme (Nasdaq: GENZ  ) finally moving forward with its acquisition by sanofi-aventis (NYSE: SNY  ) , Celgene can't rest on its laurels. To try to boost its pipeline, Celgene bought Abraxis Bioscience last June, giving it the rights to Abraxis' cancer drug Abraxane.

Where Celgene falls short on our 10-point scale is in its failure to pay a dividend, unlike big pharma stocks such as Pfizer (NYSE: PFE  ) and Merck (NYSE: MRK  ) . Yet as Fool biotech expert Brian Orelli points out, companies such as Celgene are better served if they can fund a blockbuster drug rather than simply returning capital to shareholders.

Celgene looks nearly perfect, but the reality in biotech and pharma is that companies need to keep performing year in and year out to maintain their edge. Even if you like Celgene, you'll want to keep a close eye on the company to make sure it keeps getting the job done.

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.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Pfizer is a Motley Fool Inside Value pick. 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 Fool has a disclosure policy.


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  • Report this Comment On April 06, 2011, at 1:41 PM, biotech101invest wrote:

    Yes CELG should be bought here. It just filled the gap and is ready to go higher.

    It has a 95%+ margin on its biggest selling drug Revlimid - which could become the biggest selling oncology drug of all time as duration and market share continue to increase in the US and EU. Also it will eventually be approved in NHL and CLL. Tax rate is an industry low 18% that's to a 10 yr tax agreement in Switzerland where they manufacture Revlimid.

    Most biotech sold international rights to their drugs when they were unprofitable.CELG turned down $1.5 billion before approval and now they are reaping the rewards. Japan (second largest oncology mkt in world) launch is exceeding expectations - already beating Velcade in sales in less than a yr on market. Turkey adn Russia pricing approval is now in hand and launch starting. Brazil will increase So Amer sales by 75%.

    Company has $3 billion in cash and positive ANNUAL cash flow from operations of $1.6-$1.8 billion this yr, over $2 billion next.

    Your PE comment calculation should not be used for a growth company because CELG's PE on next yrs earnings is at a DEEP DISCOUNT to its EPS growth rate.

    And remember company has said publically its conservative estimate for EPS and revenue for 2015 are $8 a share and $8 billion.

    Overhang on SPM issue will be gone after May 5th Myeloma workshop.

    Revlimid-Dex is in 180,000 patients and has an incredibly low 0.4% SPM rate - vs 6% + norm rate in this population. It appears Revlimid-Dex actually reduces SPM occurance.

    Melphalan, stem cell transplants and double stem cell transplants and previous DCEP use are clear causes of secondary cancers historically.

    Once the issue is clear - and Q1 Revlmid sales are disclosed - this stock will head back into the 60s where it really belongs now. Its eps growth exceeds every large cap biotech and its priced at a deep discount on a PEG basis.

    BUY Celgene on this gap fill to 55s here. Buy right here right now.

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