Is Dendreon 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 Dendreon (Nasdaq: DNDN  ) 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 Dendreon.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 261.9% Pass
  1-Year Revenue Growth > 12% 4,169.8% Pass
Margins Gross Margin > 35% 40.6% Pass
  Net Margin > 15% NM NM
Balance Sheet Debt to Equity < 50% 128.8% Fail
  Current Ratio > 1.3 1.35 Pass
Opportunities Return on Equity > 15% (76.3%) 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 & Poor's. NM = not meaningful due to negative net income and normalized earnings during the period. Total score = number of passes.

Dendreon's score of 4 seems safely in the middle ground. But the bombshell that the biotech dropped on investors last week could spell disaster for the company's future.

Biotech investing is full of potential pitfalls. For every company whose drugs get approved, countless others never pay off. In between are biotechs such as Vical (Nasdaq: VICL  ) , which has had to wait through years of trials for a final answer on whether its TransVax antiviral is effective, and Amarin (Nasdaq: AMRN  ) , whose fat-fighter AMR101 appears poised for approval once the company files its FDA application next month.

In that light, as recently as early last week, Dendreon seemed like a success story. The company's cancer drug Provenge had gotten FDA approval and was finally on the market. Despite an expensive $93,000 treatment, Humana (NYSE: HUM  ) , Aetna (NYSE: AET  ) , and other insurance carriers had agreed to pay for it. Even Medicare said it would cover its cost. All Dendreon had to do was to get doctors to prescribe it.

But so far, that hasn't happened. Last week, Dendreon removed its sales guidance and called for only “modest” growth, sending the stock down 65%. The challenge of Provenge is that it's an individually tailored treatment, but Dendreon needs to ramp up production quickly in order to make shareholders happy.

At least for now, Dendreon can't promise a perfect result for its investors. Only time will tell whether the biotech can resume its path upward or whether Provenge will fall short of its potential.

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 Dendreon 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. 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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