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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.
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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