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 Sanofi (NYSE: SNY ) 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 Sanofi.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.5%||Fail|
|1-Year Revenue Growth > 12%||9.4%||Fail|
|Margins||Gross Margin > 35%||70.3%||Pass|
|Net Margin > 15%||16.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||27.4%||Pass|
|Current Ratio > 1.3||1.53||Pass|
|Opportunities||Return on Equity > 15%||10.8%||Fail|
|Valuation||Normalized P/E < 20||13.61||Pass|
|Dividends||Current Yield > 2%||4.7%||Pass|
|5-Year Dividend Growth > 10%||8.7%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Sanofi last year, the company has seen its score drop by a point. The company's dividend growth has slowed just a bit this year, but it still has a formidable yield, and the shares have done reasonably well in the past year.
Overall, Sanofi has done a reasonable job keeping its sales figures up despite some big challenges. Several of its drugs have seen major competition open up, with its Taxotere prostate cancer drug seeing big sales declines due in part to the emergence of Dendreon's (Nasdaq: DNDN ) rival treatment, Provenge. Similarly, sales of Sanofi's blood clot preventer Lovenox have declined as Momenta Pharmaceuticals (Nasdaq: MNTA ) has had its own generic version. Even worse is this year's loss of patent protection on blood thinner Plavix.
Sanofi's answer to those challenges has been its buyout of Genzyme. The pickup was largely motivated by orphan-drug opportunities. Orphan drugs have a limited number of patients who need them, but they can still be extremely quite lucrative. Certainly, the acquisition route to bolster pipelines has become increasingly popular lately, as Gilead Sciences (Nasdaq: GILD ) spent $11 billion for Pharmasset. Although Gilead got an entry into the red-hot market for hepatitis C drugs, Sanofi may have gotten a better deal.
For Sanofi to get closer to perfection, it simply needs its long-term strategy to bear fruit. Investors will get a nice dividend while they wait to see how the company does, but if Sanofi can't make its acquisition work in the long run, then its importance in the pharmaceutical industry could start to fade.
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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