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 Novartis (NYSE: NVS ) 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 Novartis.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.1%||Fail|
|1-Year Revenue Growth > 12%||15.2%||Pass|
|Margins||Gross Margin > 35%||68.7%||Pass|
|Net Margin > 15%||15.3%||Pass|
|Balance Sheet||Debt to Equity < 50%||30.7%||Pass|
|Current Ratio > 1.3||1.04||Fail|
|Opportunities||Return on Equity > 15%||13.6%||Fail|
|Valuation||Normalized P/E < 20||15.99||Pass|
|Dividends||Current Yield > 2%||4.6%||Pass|
|5-Year Dividend Growth > 10%||13.6%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Novartis last year, the company has actually fallen off by a point. A slight drop in return on equity was enough to cost the drugmaker a point.
Novartis makes pharmaceuticals from both sides of the patent-protection fence. It has some huge blockbuster drugs of its own, including the multi-billion-dollar Lucentis to fight macular degeneration. In addition, its Sandoz division also makes generic versions of many drugs and has developed expertise in the biosimilars market in Europe, getting a head start over competitors Amgen (Nasdaq: AMGN ) and Momenta Pharmaceuticals (Nasdaq: MNTA ) in capitalizing on the relatively new biosimilars area.
But Europe is giving Novartis and several of its peers some tough times. Along with Pfizer (NYSE: PFE ) , Roche, and AstraZeneca (NYSE: AZN ) , Novartis sees potential problems in collecting unpaid bills from European government entities. A group representing the companies is negotiating with the Spanish government to try to get the state hospital system to pay it as much as 5.8 billion euros, but bonds the companies hold from Greece and other economically endangered European nations likely aren't worth their full face value. That could spell future losses for Novartis.
A recovery in Europe may be all that Novartis needs to approach perfection. With the Continent's woes weighing on profitability and growth, nearly everything else is in line for Novartis to boost its score once times get better.
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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