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 Savient Pharmaceuticals (Nasdaq: SVNT ) 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 Savient Pharmaceuticals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(33.5%)||Fail|
|1-Year Revenue Growth > 12%||73.3%||Pass|
|Margins||Gross Margin > 35%||(12.7%)||Fail|
|Net Margin > 15%||NM||NM|
|Balance Sheet||Debt to Equity < 50%||922.7%||Fail|
|Current Ratio > 1.3||7.37||Pass|
|Opportunities||Return on Equity > 15%||(562.9%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 8|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings that substantially exceed total revenue. Total score = number of passes.
Since we looked at Savient Pharmaceuticals last year, the company has dropped a point, as gross margins have collapsed and the company has taken on substantial debt. Shareholders have suffered through the past year, as the stock has lost close to 75% of its value.
This time last year, Savient was celebrating the approval of its gout treatment, Krystexxa. The company expected to seek a buyer, with Abbott Labs (NYSE: ABT ) , Amgen (Nasdaq: AMGN ) , and Pfizer (NYSE: PFE ) among the possible acquirers. That would have given investors a perfect exit strategy after the FDA's favorable decision.
The problem, though, is that no buyer ever showed up. That left Savient responsible for proving that it could sell Krystexxa on its own. So far, the company has had a lot of trouble doing so -- and shareholders are getting impatient. Just as Dendreon (Nasdaq: DNDN ) has struggled to generate earnings for its Provenge cancer drug, problems with Medicare billing and ramping-up marketing have held Savient's revenue well below expectations.
For Savient to get closer to perfection, it simply has to do one thing: Make Krystexxa the success story it seemed to be last year. If it can't do that, then Savient will never reach its full potential.
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.