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 Mylan
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 Mylan.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 36.2% | Pass |
| 1-year revenue growth > 12% | 7.6% | Fail | |
| Margins | Gross margin > 35% | 40.7% | Pass |
| Net margin > 15% | 6.3% | Fail | |
| Balance sheet | Debt to equity < 50% | 150.9% | Fail |
| Current ratio > 1.3 | 1.97 | Pass | |
| Opportunities | Return on equity > 15% | 10.2% | Fail |
| Valuation | Normalized P/E < 20 | 21.86 | Fail |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Mylan only manages to come up with three points on our scale. The generic-drug manufacturer has seen some strong growth in recent years, but it faces a lot of competition in a tough industry.
As a maker of low-cost generics, Mylan is well-positioned for the new reality in health care. Big drug companies Merck
In addition, with the U.S. health-care reform law a year old, many expect generics to become even more important than they are currently, boosting Mylan's prospects along with those of peers Teva Pharmaceutical
Unfortunately, Mylan hasn't executed as well on its opportunities as some of its rivals. Teva has posted much stronger returns on equity and carries much less debt on its balance sheet, yet it trades at a cheaper valuation. Dr. Reddy's margins are also much higher than Mylan's. Because of its relatively small size, Mylan's earnings are also much bumpier than those of larger companies like Teva, making it difficult for risk-averse investors to stay the course.
Mylan is in a great industry. But until it starts living up to its potential, it's not going to be a perfect stock for your portfolio.
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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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.
