Is Spectrum Pharmaceuticals the Perfect Stock?

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.

Factor

What We Want to See

Actual

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.

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.

Add Spectrum Pharmaceuticals to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of GlaxoSmithKline, which is a Motley Fool Global Gains pick. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On February 27, 2011, at 7:20 PM, stemcellanalyst wrote:

    Cephalon looks like it might just be the perfect stock. Meets all of your criteria and stunning results for Cephalon's cardiac stem cell drug were just published in Nature. Revascor reduced MACE (Major Adverse Cardiac Events : chest pain, heart attack, death, etc) by an unprecedented 84%, virtually curing heart disease with a single injection. If you can afford it, the drug has already been approved for treatment in Australia. http://bit.ly/i1pYmr

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