Is Ariad Pharmaceuticals 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 Ariad Pharmaceuticals (Nasdaq: ARIA  ) 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 Ariad Pharmaceuticals.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 174.2% Pass
  1-Year Revenue Growth > 12% 1967.3% Pass
Margins Gross Margin > 35% 100.0% Pass
  Net Margin > 15% 40.0% Pass
Balance Sheet Debt to Equity < 50% 15.2% Pass
  Current Ratio > 1.3 6.41 Pass
Opportunities Return on Equity > 15% NM NM
Valuation Normalized P/E < 20 15.16 Pass
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   7 out of 9

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

Ariad Pharmaceuticals manages an impressive score of 7. The development-stage drugmaker has made some good moves lately, but as with every small company in this industry, everything depends on whether its pipeline pans out.

Ariad has two major cancer drug prospects in development. Ridaforolimus, on which Ariad is partnering with Merck (NYSE: MRK  ) , is undergoing phase 3 trials; back in January, the company announced that one of its trials had extremely good results. With competitors Pfizer (NYSE: PFE  ) and Novartis (NYSE: NVS  ) having drugs with a similar method of targeting a particular protein, prospects look good for Ariad's drug to gain FDA approval.

Meanwhile, Ariad is testing its other cancer drug, ponatinib, on patients with particular types of leukemia who have failed other treatments. With ponatinib currently in phase 2 trials, Ariad recently announced a partnership with a small company to develop a diagnostic test to accompany the drug.

Obviously, Ariad's stratospheric growth rates aren't sustainable. But with a potential blockbuster close to the end of the pipeline hurdles, Ariad could find itself looking almost perfect if things turn out well for the drug company.

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 Ariad Pharmaceuticals 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. Novartis is a Motley Fool Global Gains recommendation. 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.


Read/Post Comments (1) | Recommend This Article (8)

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  • Report this Comment On May 10, 2011, at 12:18 PM, TruffelPig wrote:

    Agree. Very strong company! The pipeline is extremely strong. The stock is not cheap (and do not let the low P/E value fool you - that was due to a one time deal) but the company deserves attention. If you want to do me a favor do a similar analysis on ECYT - this is a meteor of a company.

    Disclaimer: Long ARIA and ECYT and PPHM in this area.

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