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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 AstraZeneca (NYSE: AZN ) 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 AstraZeneca.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||6.2%||Fail|
|1-year revenue growth > 12%||(2.1%)||Fail|
|Margins||Gross margin > 35%||82.4%||Pass|
|Net margin > 15%||24.8%||Pass|
|Balance sheet||Debt to equity < 50%||42.6%||Pass|
|Current ratio > 1.3||1.47||Pass|
|Opportunities||Return on equity > 15%||37.8%||Pass|
|Valuation||Normalized P/E < 20||8.62||Pass|
|Dividends||Current yield > 2%||5%||Pass|
|5-year dividend growth > 10%||14.4%||Pass|
|Total Score||8 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
AstraZeneca's impressive score of eight is a cure for the shareholder blues. But don't let the score fool you: The drugmaker faces the same challenges in maintaining its pipeline that most of its peers are dealing with right now.
But the company faces a dual problem. First, it has its own patent cliff to contend with, as four out of five of its best-selling drugs come off patent in the next four years. Even worse, generic versions of competing drugs can actually eat into AstraZeneca's profits as well. For instance, a generic version of Merck (NYSE: MRK ) drug Zocor has hurt not just Merck but also Pfizer (NYSE: PFE ) and AstraZeneca, as sales of both Crestor and Pfizer's Lipitor get hurt by patients opting for generics even when drugs aren't directly comparable.
The drugmaker got some good news a couple months ago, when the Food and Drug Administration approved its cancer drug vandetanib. The drug has a lock on the late-stage medullary thyroid cancer market, but it won't be a blockbuster for the company -- the disease strikes only a couple thousand patients.
AstraZeneca's backward-looking results are undoubtedly impressive. But like Eli Lilly (NYSE: LLY ) and GlaxoSmithKline (NYSE: GSK ) , the company's low valuations reveal that investors are worried about what the future will bring. If AstraZeneca can pull another rabbit out of its hat in the form of a blockbuster new drug, then shares could quickly jump to levels that reflect its financial strength.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.