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 Elan
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 Elan.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 19.2% | Pass |
| 1-Year Revenue Growth > 12% | 10.6% | Fail | |
| Margins | Gross Margin > 35% | 49.4% | Pass |
| Net Margin > 15% | 50.1% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 135.0% | Fail |
| Current Ratio > 1.3 | 3.54 | Pass | |
| Opportunities | Return on Equity > 15% | 107.8% | Pass |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 5 out of 9 |
Source: S&P Capital IQ. NM = not meaningful due to negative normalized earnings. Total score = number of passes.
Since we looked at Elan last year, the drugmaker has picked up two points. Higher net margins and returns on equity gave the stock its score boost, but most of those gains came from a one-time asset sale that masked continued operating weakness.
Elan was a huge performer last year, with its stock rising 140%. The company's primary revenue comes from its multiple sclerosis drug Tysabri, which it splits with Biogen Idec
Looking forward, though, Elan retains only a small interest in its most advanced Alzheimer's disease drug prospect, with 75% of the rights to bapineuzumab belonging to Pfizer
Elan generated a bunch of cash when it sold its Elan Drug Technology unit to Alkermes
To reach perfection, Elan needs to keep moving forward in its quest toward becoming profitable. The company has already taken big strides to get its debt under control, but it really needs Tysabri and bapineuzumab to do well. Only if that happens will Elan start looking like a perfect stock.
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.
Elan could generate some strong results, but we think we've got some safer long-term plays. Take a look at the Fool's latest special report (it's absolutely free!) to get some more good stock ideas. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.
Click here to add Elan to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
