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 PDL BioPharma (Nasdaq: PDLI ) 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 PDL BioPharma.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(1.3%)||Fail|
|1-Year Revenue Growth > 12%||11.7%||Fail|
|Margins||Gross Margin > 35%||100%||Pass|
|Net Margin > 15%||37.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||NM||NM|
|Current Ratio > 1.3||1.26||Fail|
|Opportunities||Return on Equity > 15%||NM||NM|
|Valuation||Normalized P/E < 20||6.04||Pass|
|Dividends||Current Yield > 2%||9.7%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||4 out of 7|
Source: S&P Capital IQ. NM = not meaningful; PDL BioPharma had negative equity over the period and started paying a dividend in May 2008. Total score = number of passes.
Since we looked at PDL BioPharma last year, the biotech hasn't budged much from its year-ago numbers. But that's not terribly surprising, given the unique nature of PDL BioPharma's business.
Unlike most biotechs, PDL BioPharma isn't in the business of developing new drugs. Rather, it owns a set of patents related to technology called humanized monoclonal antibodies. Among its customers are Elan (NYSE: ELN ) and Biogen Idec (Nasdaq: BIIB ) , whose Tysabri drug used licensed technology from PDL BioPharma.
Having patented technology requires fighting to defend those patents, and PDL BioPharma has turned those fights into revenue opportunities. The company resolved disputes with several companies in the past year, including AstraZeneca (NYSE: AZN ) and Novartis (NYSE: NVS ) . Those resolutions will bring in more royalty income.
The problem with patents, though, is that they eventually expire. That may be why PDL BioPharma is looking to buy new royalty streams, thereby extending the company's viable lifespan.
Having moved from special dividends to a pure regular-dividend payout has improved income visibility for shareholders, although it's also led to a drop in the payout. For PDL BioPharma to get closer to perfection, though, it needs to come up with a long-term survival strategy. Otherwise, investors could have the unusual -- though not necessarily unprofitable -- experience of getting cash back in liquidation after a few more years.
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."