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 Amgen (Nasdaq: AMGN ) 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 Amgen.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.8%||Fail|
|1-Year Revenue Growth > 12%||3.5%||Fail|
|Margins||Gross Margin > 35%||84.9%||Pass|
|Net Margin > 15%||23.6%||Pass|
|Balance Sheet||Debt to Equity < 50%||112.6%||Fail|
|Current Ratio > 1.3||4.80||Pass|
|Opportunities||Return on Equity > 15%||17.1%||Pass|
|Valuation||Normalized P/E < 20||19.87||Pass|
|Dividends||Current Yield > 2%||2.1%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||6 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Amgen declared its first dividend in Dec. 2011. Total score = number of passes.
Since we looked at Amgen last year, the biotech giant has picked up a point. The company's landmark decision to start paying a dividend pushed its score up, and it's a great sign of strength for shareholders.
Once upon a time, biotech companies were all tiny startups. But over time, the cream of the crop has risen to take its place among the top health-care stocks in the market. Gilead Sciences (Nasdaq: GILD ) has ridden the demand for HIV and hepatitis drugs to huge gains in recent years, and its move into the cancer field could ignite a second stage of growth. Both Gilead and Amgen have turned into huge cash cows.
But Amgen is so big that it has started returning money to shareholders the old-fashioned way: through dividends. It's something that other companies aren't doing, as they instead focus on big acquisitions. Gilead, for instance, picked up fellow hep C company Pharmasset earlier this month, using up a whopping $11 billion in the process. Celgene (Nasdaq: CELG ) , which some have seen as a potential takeover target itself, bought privately held Avila Therapeutics at the much cheaper price of $350 million upfront plus another $575 million in potential milestone payments tied to drug success.
Amgen will find it hard to restart its growth engines enough to get back to fast growth. But paying a dividend is a step in the right direction, showing that Amgen has reached full maturity as a lasting player in the health-care space.
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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