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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 Seattle Genetics (Nasdaq: SGEN ) 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 Seattle Genetics.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||51.1%||Pass|
|1-year revenue growth > 12%||(18%)||Fail|
|Margins||Gross margin > 35%||(102.9%)||Fail|
|Net margin > 15%||(150.8%)||Fail|
|Balance sheet||Debt to equity < 50%||0%||Pass|
|Current ratio > 1.3||7.61||Pass|
|Opportunities||Return on equity > 15%||(41.9%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total Score||3 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.
With just three points, Seattle Genetics isn't breeding success just yet. But with one drug in the FDA pipeline and the potential for royalty income from more than a dozen others, the tiny biotech has many investors very interested.
Seattle Genetics has a very promising drug, brentuximab vedotin, which has had positive trial results for a couple of different indications. Last year, the company announced favorable trials for both Hodgkin's lymphoma patients and for those suffering from anaplastic large cell lymphoma.
The bigger potential for Seattle Genetics may come from licensing its antibody-drug conjugate technology, on which brentuximab vedotin is based. Big drugmakers including GlaxoSmithKline (NYSE: GSK ) , AstraZeneca (NYSE: AZN ) , and Pfizer (NYSE: PFE ) already signed up with licensing agreements, and any drugs that those companies make from Seattle Genetics' technology will lead to milestone payments and royalties. In addition, smaller companies, such as Celldex Therapeutics (Nasdaq: CLDX ) and Progenics Pharmaceuticals (Nasdaq: PGNX ) , have also hitched their fortunes to antibody-drug conjugate licensing.
But for now, investors are firmly focused on the FDA approval process for brentuximab vedotin. Right now, an FDA advisory panel is looking at the drug's supporting trials to come up with a recommendation. Fool biotech expert Brian Orelli thinks that outright regular approval is unlikely, but with confirmatory trials in the works for the Hodgkin's lymphoma indication, an accelerated approval is possible.
As with most small biotechs, Seattle Genetics has financials that look pretty ugly right now. All that could change, though, with an FDA approval. Even if it isn't perfect yet, Seattle Genetics is worth keeping an eye on for those investors with a speculative bent.
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 Seattle Genetics 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.