Has Gilead Sciences Become 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 Gilead Sciences (Nasdaq: GILD  ) 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 Gilead Sciences.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 24.5% Pass
  1-Year Revenue Growth > 12% 2.5% Fail
Margins Gross Margin > 35% 75.1% Pass
  Net Margin > 15% 33.8% Pass
Balance Sheet Debt to Equity < 50% 62.4% Fail
  Current Ratio > 1.3 2.76 Pass
Opportunities Return on Equity > 15% 45.5% Pass
Valuation Normalized P/E < 20 16.57 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Gilead Sciences last year, the biotech has lost a point, with the culprit being a falloff in revenue growth over the past year. But the company is taking some aggressive steps toward restarting its growth engines that have some wondering if it's moving in the right direction.

Gilead is best known for its long-standing expertise in the HIV/AIDS drug market. But the company is now well out of its hypergrowth phase, with revenue growth from HIV and hepatitis B drugs slowing to single-digit percentages recently. It now has partnerships with Johnson & Johnson (NYSE: JNJ  ) and Bristol-Myers Squibb (NYSE: BMY  ) to develop new cocktails, including multiple drugs to stand up to strong competition from other pharma companies.

That's likely what has the whole industry focusing on other opportunities. Most notably, Gilead drew first blood in what has become an extremely competitive environment for hepatitis C treatments. In November, Gilead agreed to buy out Pharmasset in an $11.2 billion deal that closed earlier this month. Many saw the move as a huge gamble, with Pharmasset's PSI-7977 still in phase 3 clinical trials. Yet when Bristol-Myers spent $2.5 billion to buy Inhibitex (Nasdaq: INHX  ) , which has only gotten its drug through phase 1 trials, it seemingly validated Gilead's move. And with fellow hep-C player Achillion Pharmaceuticals (Nasdaq: ACHN  ) having seen its shares double since October, it's clear that investors think there's more merger activity ahead.

For Gilead, though, its lot in the hep C wars is cast. To reach perfection, it needs to make good on the promise of all of its drugs, both legacy and newly acquired. If it can do so, it may reignite its growth engine and keep investors happy for several more years.

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.

Gilead's an interesting stock, but we've got some ideas you might like even better. You'll find the names of three promising stocks for the long haul right here in the Fool's latest special report. It's completely free, but don't wait -- click here and read it today.

Click here to add Gilead Sciences to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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 Gilead Sciences and Johnson & Johnson, as well as creating a diagonal call position in 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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