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 if 3SBio
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. 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 don't mean anything if a company can't turn them into profits. Strong margins ensure 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 3SBio.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||32.7%||Pass|
|1-Year Revenue Growth > 12%||29.4%||Pass|
|Margins||Gross Margin > 35%||90.9%||Pass|
|Net Margin > 15%||22.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||19.61||Pass|
|Opportunities||Return on Equity > 15%||8.3%||Fail|
|Valuation||Normalized P/E < 20||34.63||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
3SBio clocks in with a promising score of 6. Although the relatively young Chinese biotech company doesn't have a long history, it's made plenty of waves in recent years.
3SBio specializes in biogenerics, which are generic versions of biologic drugs. In the U.S., the lack of a well-defined regulatory pathway to get FDA approval for biogenerics has hamstrung the market. Although Novartis
That's where 3SBio's location in China gives it a huge advantage. Without the same level of scrutiny from regulators, 3SBio can develop and sell drugs in its home market much more quickly and efficiently. Its dialysis drug erythropoietin, for instance, stands up to similar drugs from Amgen
Concerns over Chinese startups with questionable prospects have rocked the markets lately. But with actual products that work, 3SBio has real potential to get closer to perfect in the future.
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."
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 3SBio is a Motley Fool Rule Breakers recommendation. Novartis is a Motley Fool Global Gains pick. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Inside Value and Motley Fool Income Investor recommendation. The Fool owns shares of Johnson & Johnson and Teva Pharmaceutical. Motley Fool Alpha owns shares of Johnson & Johnson. We Fools may not 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.