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Is Vertex Pharmaceuticals 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 Vertex Pharmaceuticals (Nasdaq: VRTX  ) 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 Vertex Pharmaceuticals.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 48.5% Pass
  1-Year Revenue Growth > 12% 812.5% Pass
Margins Gross Margin > 35% 93.4% Pass
  Net Margin > 15% 16.7% Pass
Balance Sheet Debt to Equity < 50% 36.2% Pass
  Current Ratio > 1.3 3.39 Pass
Opportunities Return on Equity > 15% 40.8% Pass
Valuation Normalized P/E < 20 45.87 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.

With seven points, Vertex Pharmaceuticals has only a little further to go to reach perfect status. Too-high valuations and a lack of dividends aren't likely to go away soon, but the company has plenty of potential for future growth to sustain its other numbers.

Vertex was one of the pioneers in the now-hot hepatitis C treatment space. About a year ago, the FDA approved Vertex's hep C drug, Incivek, coming at almost the same time as Merck's (NYSE: MRK  ) rival Victrelis. So far, Vertex has won that battle hands-down.

But competition is on the horizon. With new drugs in development from Achillion Pharmaceuticals (Nasdaq: ACHN  ) , Bristol-Myers Squibb (NYSE: BMY  ) , and Johnson & Johnson, some fear that Vertex's days in the limelight may be numbered. In order to win in the highly competitive hep C market, Vertex can't rest on the laurels of its Incivek success; it also has to develop a cocktail of other supporting drugs to improve safety and efficacy. Yet as Gilead Sciences (Nasdaq: GILD  ) moves forward with all-oral hep C treatments, any Vertex combination that involves injections will be at a big disadvantage. Moreover, as it cures patients, Vertex sabotages its own future revenue stream.

The key is to find new drugs in different areas. Yesterday, Vertex shares vaulted 55% higher after the company released favorable results for its Kalydeco cystic fibrosis drug. Although the drug has a long way to go before it would come up for approval, the news marks a nice turnaround from past disappointment.

For Vertex to keep moving forward, it needs to follow through with successes in its pipeline. With its strong combination of existing drugs and new prospects, Vertex could easily become a perfect stock in the coming 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.

Vertex Pharmaceuticals may not be the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Vertex Pharmaceuticals 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 Vertex Pharmaceuticals, Johnson & Johnson, and Gilead Sciences, 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.

Read/Post Comments (1) | Recommend This Article (2)

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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 May 08, 2012, at 10:50 AM, fibromom wrote:

    The FDA has already approved Kalydeco which only treats a very small population in the CF community. The news yesterday is for another drug that they are in 2nd phase trials that works in conjunction with Kalydeco that would treat a much much larger CF population. If this second drug wins approval that would be huge for Vertex and the Cystic Fibrosis community at large.

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