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 Inhibitex (Nasdaq: INHX ) 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 Inhibitex.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||20.3%||Pass|
|1-Year Revenue Growth > 12%||14.1%||Pass|
|Margins||Gross Margin > 35%||100%||Pass|
|Net Margin > 15%||NM||NM|
|Balance Sheet||Debt to Equity < 50%||0.8%||Pass|
|Current Ratio > 1.3||9.42||Pass|
|Opportunities||Return on Equity > 15%||(72%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 8|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings that substantially exceeded total revenue. Total score = number of passes.
With a score of 5, Inhibitex actually does pretty well for a small company. The young biotech has shot up recently on promising news for its main drug.
As with most small biotechs, Inhibitex's success or failure largely rests on a single drug. For Inhibitex, that drug is INX-189, a treatment for hepatitis C. That's a crowded space, with Gilead Sciences (Nasdaq: GILD ) and Idenix Pharmaceuticals (Nasdaq: IDIX ) having drugs in development. Moreover, Pharmasset (Nasdaq: VRUS ) has partnered with giants Bristol-Myers Squibb (NYSE: BMY ) and Johnson & Johnson (NYSE: JNJ ) .
But unlike many biotechs, Inhibitex has gotten some unquestionably positive news lately. The company announced that INX-189 turned in unexpectedly good trial results. Although Vertex Pharmaceuticals (Nasdaq: VRTX ) arguably has the lead in the space, Inhibitex's treatment would be a big advantage over Vertex's Incivek, which still requires patients to take interferon in conjunction with the drug.
The key to remember, though, is that INX-189 is only in phase 2 trials right now. It still has a long way to go before FDA approval even comes onto the table. Investors who are already treating it like a perfect stock are getting ahead of themselves, but there's no denying that Inhibitex has a great deal of promise.
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 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."