Is Pharmacyclics 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 Pharmacyclics (Nasdaq: PCYC  ) 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 Pharmacyclics.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 99.4% Pass
  1-Year Revenue Growth > 12% (44.1%) Fail
Margins Gross Margin > 35% 100% Pass
  Net Margin > 15% NM NM
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 6.96 Pass
Opportunities Return on Equity > 15% (54%) 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: S&P Capital IQ. NM = not meaningful; Pharmacyclics had negative earnings over the past 12 months that greatly exceeded total revenues. Total score = number of passes.

With four points, Pharmacyclics has a couple of things going for it. Although the developmental-stage biotech company still hasn't seen sales take off, a recent deal with a pharma giant may be just what the doctor ordered for the stock.

Pharmacyclics has struggled for years trying to develop a drug that would receive FDA approval, with no success. Earlier this year, though, investors got excited by the company's blood-cancer treatment PCI-32765, which had positive early phase clinical study results in treating leukemia and lymphoma. As often happens, the attention fed on itself, with institutional investors adding big share purchases of Pharmacyclics stock during the third quarter, along with shares of Seattle Genetics (Nasdaq: SGEN  ) , Jazz Pharmaceuticals (Nasdaq: JAZZ  ) , and Cubist Pharmaceuticals (Nasdaq: CBST  ) .

Last week, Pharmacyclics announced a licensing deal whereby a unit of Johnson & Johnson (NYSE: JNJ  ) agreed to pay the company an upfront $150 million, along with potential milestone payments down the road that could add as much as $825 million to the deal if PCI-32765 gets approval for different types of cancer. Although analysts downgraded Pharmacyclics, the potential of the J&J deal is huge compared to the current valuation investors are putting on the shares.

The deal does leave Pharmacyclics responsible for a substantial part of development costs, so for the stock to reach perfection, PCI-32765 or its other early-stage drugs need to pay off for the company. If they do, though, then the sky's the limit for Pharmacyclics.

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 the best investments from the rest.

Click here to add Pharmacyclics 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. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position on Johnson & Johnson. 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2012, at 2:16 PM, colleencyn wrote:

    i believe this stock owned by one of the same

    ISRG and I bet on a big upside. Good company and good purposes.

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