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 ViroPharma (Nasdaq: VPHM ) 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 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 ViroPharma.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||21.1%||Pass|
|1-Year Revenue Growth > 12%||4.8%||Fail|
|Margins||Gross Margin > 35%||81.4%||Pass|
|Net Margin > 15%||18.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||18.4%||Pass|
|Current Ratio > 1.3||3.16||Pass|
|Opportunities||Return on Equity > 15%||11.0%||Fail|
|Valuation||Normalized P/E < 20||21.0||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at ViroPharma last year, the company has lost three full points. Falling revenue growth and returns on equity were responsible for much of the loss, while a jump of nearly 50% over the past year has contributed a big rise in its earnings multiple as well.
For years, ViroPharma's big cash cow was Vancocin, a colitis drug that it bought from Eli Lilly (NYSE: LLY ) in 2004. The drug accounted for more than half of ViroPharma's sales in 2011. But this year, Watson Pharmaceuticals (NYSE: WPI ) won the right to market a generic version of the drug, which sent the shares skidding as investors feared that the big plunge in revenue would put a stop to the company's phenomenal growth. Since then, Akorn (Nasdaq: AKRX ) has also launched a generic version, and although generic giants Teva Pharmaceutical (Nasdaq: TEVA ) and Mylan haven't followed suit, the damage has still been done for ViroPharma.
Fortunately, ViroPharma doesn't have all its eggs in one basket. Its hereditary angioedema drug Cinryze also has substantial potential. But it, too, has faced some challenges, with the company having had to wait for approval of scaled-up industrial manufacturing of the drug. This month, the FDA approved ramped-up Cinryze production, but it could still take a few more weeks before ViroPharma starts seeing the effects.
For ViroPharma to get back moving in the right direction, it needs Cinryze to start producing the revenue and earnings that the company used to get from Vancocin. Without that, ViroPharma may already have had the closest brush with perfection that it will ever have.
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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