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 Allos Therapeutics (Nasdaq: ALTH) 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 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 Allos Therapeutics.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% NM NM
  1-Year Revenue Growth > 12% 251.9% Pass
Margins Gross Margin > 35% 89.9% Pass
  Net Margin > 15% (186.3%) Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 5.76 Pass
Opportunities Return on Equity > 15% (62.4%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   4 out of 8

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Allos had no revenue five years ago and negative earnings during the past 12 months. Total score = number of passes.

A score of 4 isn't going to heal all of Allos Therapeutics' wounds. Unlike many of its peers, the company has a promising product already with approval from the Food and Drug Administration, but it needs to reach a broader audience to deliver blockbuster results for shareholders.

Allos' biggest prospect is its cancer drug Folotyn, which helps treat patients with peripheral T-cell lymphoma. Because the disease is rare, the company charged big sums -- $30,000 per month -- when it first came out in January 2010, raising the ire of health insurers like UnitedHealth Group (NYSE: UNH).

But the moat isn't permanent for Allos. Even when Folotyn first came out, Celgene (Nasdaq: CELG) bought a privately held rival with a competing drug in clinical trials. Now, the company also has to face down Spectrum Pharmaceuticals (Nasdaq: SPPI) and ZIOPHARM Oncology (Nasdaq: ZIOP), both of which also have potential rival drugs in their pipelines.

Those scares have pushed Allos' stock down substantially. The real key to the company's future is expanding the approved indications for Folotyn. Without a breakthrough for its only drug, Allos may never become a perfect stock for shareholders.

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.

Click here to add Allos Therapeutics 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 Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position on UnitedHealth Group. 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.