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 Amgen
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 Amgen.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.8%||Fail|
|1-Year Revenue Growth > 12%||3.5%||Fail|
|Margins||Gross Margin > 35%||84.9%||Pass|
|Net Margin > 15%||23.6%||Pass|
|Balance Sheet||Debt to Equity < 50%||112.6%||Fail|
|Current Ratio > 1.3||4.80||Pass|
|Opportunities||Return on Equity > 15%||17.1%||Pass|
|Valuation||Normalized P/E < 20||19.87||Pass|
|Dividends||Current Yield > 2%||2.1%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||6 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Amgen declared its first dividend in Dec. 2011. Total score = number of passes.
Since we looked at Amgen last year, the biotech giant has picked up a point. The company's landmark decision to start paying a dividend pushed its score up, and it's a great sign of strength for shareholders.
Once upon a time, biotech companies were all tiny startups. But over time, the cream of the crop has risen to take its place among the top health-care stocks in the market. Gilead Sciences
But Amgen is so big that it has started returning money to shareholders the old-fashioned way: through dividends. It's something that other companies aren't doing, as they instead focus on big acquisitions. Gilead, for instance, picked up fellow hep C company Pharmasset earlier this month, using up a whopping $11 billion in the process. Celgene
Still, Amgen hasn't been afraid to join the acquisition party. Last week, it agreed to buy Micromet
Amgen will find it hard to restart its growth engines enough to get back to fast growth. But paying a dividend is a step in the right direction, showing that Amgen has reached full maturity as a lasting player in the health-care space.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Gilead Sciences. 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.