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 and then decide whether XOMA (Nasdaq: XOMA) 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. 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 mean nothing if a company can't produce profits from them. Strong margins ensure that a 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.
  • Moneymaking 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 XOMA.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 12.5% Fail
  1-Year Revenue Growth > 12% (65.8%) Fail
Margins Gross Margin > 35% 42.5% Pass
  Net Margin > 15% (204.4%) Fail
Balance Sheet Debt to Equity < 50% 58.0% Fail
  Current Ratio > 1.3 1.66 Pass
Opportunities Return on Equity > 15% (334.4%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
  Total Score   2 out of 9

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With just 2 points, XOMA clearly falls short of perfection. But like many small biotech companies, XOMA has some interesting prospects in its pipeline that could bring huge gains to investors with an appetite for risk.

XOMA has an interesting track record. It's been around since the 1980s, and along the way, the company has formed a number of partnerships and licensing arrangements. XOMA has worked with Novartis (NYSE: NVS) on cancer treatments as well as with Merck (NYSE: MRK). In addition, the company licenses its bacterial cell expression technology to companies including Biogen Idec (Nasdaq: BIIB), Eli Lilly (NYSE: LLY), and Pfizer (NYSE: PFE).

But XOMA's big prospect for blockbuster status is its XOMA 052 drug, which it has targeted for treating a wide range of diseases, including gout, arthritis, and heart problems. Recently, the company announced phase 2b trial results that showed that XOMA 052 didn't work as a treatment for diabetes, but the company plans to move on to cardiovascular trials over the next year.

Like most biotechs, XOMA is for investors who are willing to take a lot of risk for potentially huge rewards. Shareholders aren't likely to see the stock push toward perfection quickly, but all it would take is one big success to turn the tide.

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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