Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide whether Spectrum Pharmaceuticals (Nasdaq: SPPI ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- Growth. Expanding businesses show healthy revenue growth. Although past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure that a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Spectrum Pharmaceuticals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||140.3%||Pass|
|1-Year Revenue Growth > 12%||30.3%||Pass|
|Margins||Gross Margin > 35%||73.2%||Pass|
|Net Margin > 15%||(88.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0.1%||Pass|
|Current Ratio > 1.3||2.10||Pass|
|Opportunities||Return on Equity > 15%||(45.6%)||Fail|
|Valuation||Normalized P/E < 20||NM||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Spectrum had negative earnings during the period. Total score = number of passes.
Spectrum Pharmaceuticals comes in with a middle-of-the-road score of 5. Despite enjoying stellar growth in recent years, Spectrum still needs to prove that it can become profitable.
Spectrum is a small company, but it already has two cancer drugs on the market: Zevalin to treat non-Hodgkin's lymphoma and Fusilev to treat certain bone-cancer patients. The company also recently announced that it would develop a biosimilar version of the lymphoma drug Rituxan, which Biogen Idec (Nasdaq: BIIB ) produces.
For the moment, Spectrum's best bet is Zevalin. But even with impressive growth, sales are still relatively low. Moreover, the drug faces competition from a variety of alternative treatments for non-Hodgkin's lymphoma, including Biogen Idec's Rituxan, GlaxoSmithKline's (NYSE: GSK ) Bexxar, and Cephalon's (Nasdaq: CEPH ) Treanda.
For a small company, Spectrum has already come a long way. The next several years should tell whether Spectrum is destined to become the perfect stock, but for investors willing to speculate on the company's success, Spectrum deserves a closer look.
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."