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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 Allos Therapeutics (Nasdaq: ALTH ) 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 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 Allos Therapeutics.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||NM||NM|
|1-Year Revenue Growth > 12%||251.9%||Pass|
|Margins||Gross Margin > 35%||89.9%||Pass|
|Net Margin > 15%||(186.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||5.76||Pass|
|Opportunities||Return on Equity > 15%||(62.4%)||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: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Allos had no revenue five years ago and negative earnings during the past 12 months. Total score = number of passes.
A score of 4 isn't going to heal all of Allos Therapeutics' wounds. Unlike many of its peers, the company has a promising product already with approval from the Food and Drug Administration, but it needs to reach a broader audience to deliver blockbuster results for shareholders.
Allos' biggest prospect is its cancer drug Folotyn, which helps treat patients with peripheral T-cell lymphoma. Because the disease is rare, the company charged big sums -- $30,000 per month -- when it first came out in January 2010, raising the ire of health insurers like UnitedHealth Group (NYSE: UNH ) .
But the moat isn't permanent for Allos. Even when Folotyn first came out, Celgene (Nasdaq: CELG ) bought a privately held rival with a competing drug in clinical trials. Now, the company also has to face down Spectrum Pharmaceuticals (Nasdaq: SPPI ) and ZIOPHARM Oncology (Nasdaq: ZIOP ) , both of which also have potential rival drugs in their pipelines.
Those scares have pushed Allos' stock down substantially. The real key to the company's future is expanding the approved indications for Folotyn. Without a breakthrough for its only drug, Allos may never become a perfect stock for shareholders.
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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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.