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
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.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 3.7% | Fail |
| 1-Year Revenue Growth > 12% | (1%) | Fail | |
| Margins | Gross Margin > 35% | 81.3% | Pass |
| Net Margin > 15% | 26.7% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 43.2% | Pass |
| Current Ratio > 1.3 | 1.36 | Pass | |
| Opportunities | Return on Equity > 15% | 39.5% | Pass |
| Valuation | Normalized P/E < 20 | 7.63 | Pass |
| Dividends | Current Yield > 2% | 6.8% | Pass |
| 5-Year Dividend Growth > 10% | 10.2% | Pass | |
| Total Score | 8 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at AstraZeneca last year, the company has hung on to its eight-point score. But shares have fallen nearly 20% over the past year as the drugmaker hasn't found a way to boost its revenue growth.
Like many of its peers, AstraZeneca faces a patent cliff for some of its established drugs. With both Teva Pharmaceutical
For pharma companies to defend themselves from generic competition, mergers have become a bigger part of the industry dynamic. With Amylin Pharmaceuticals
Unfortunately, AstraZeneca's pipeline has also hit some snags. Earlier this year, the company gave up on its depression drug TC-5214 after phase 3 trials failed to reach their goals. Without some successes to make up for failures, AstraZeneca will have a hard time keeping its current position.
To improve, AstraZeneca needs to find a way to reawaken its sales growth. A blockbuster drug could do that, but until the company finds one, it's more likely to go backward on its path toward perfection than forward.
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.
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