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 Spectrum Pharmaceuticals (Nasdaq: SPPI ) 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 Spectrum Pharmaceuticals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||106.9%||Pass|
|1-Year Revenue Growth > 12%||160.4%||Pass|
|Margins||Gross Margin > 35%||82.5%||Pass|
|Net Margin > 15%||25.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.88||Pass|
|Opportunities||Return on Equity > 15%||37.0%||Pass|
|Valuation||Normalized P/E < 20||22.78||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Spectrum Pharmaceuticals last year, the company has jumped two points. Becoming profitable has been a big boost for the biotech.
Spectrum had a huge 2011, as the company was profitable for the entire year. Shareholders have reaped the rewards: The stock has almost doubled in the past 12 months.
The reason: strength in Spectrum's drug lineup. For instance, the company has managed to make it easier for doctors to use its Zevalin non-Hodgkin lymphoma treatment, something former owners Cell Therapeutics (Nasdaq: CTIC ) and Biogen Idec (Nasdaq: BIIB ) were never able to accomplish. By getting the FDA to allow doctors to administer Zevalin without having to do a bioscan, Spectrum hopes that sales will pick up.
More critically, top-selling drug Fusilev has benefited because supplies of leucovorin, a related generic drug, have been extremely limited. As long as that situation persists, then Spectrum will reap the benefits -- but it likely won't last forever.
Still, the future looks bright for Spectrum. With bladder-cancer drug apaziquone expected to release phase 3 trial data soon, both Spectrum and partner Allergan (NYSE: AGN ) are hoping for positive results. And although similar study results for peripheral T-cell lymphoma treatment belinostat won't be available until late in 2012, success there could boost Zevalin sales even as it faces competition from Celgene (Nasdaq: CELG ) and Allos Therapeutics.
For Spectrum to reach perfection, it will eventually need to start returning capital to shareholders in the form of dividends. That step shouldn't come, however, until its current stable of drug candidates gets approved and starts to ramp up sales.
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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