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 Elan (NYSE: ELN) 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. 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 Elan.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 19.2% Pass
  1-Year Revenue Growth > 12% 10.6% Fail
Margins Gross Margin > 35% 49.4% Pass
  Net Margin > 15% 50.1% Pass
Balance Sheet Debt to Equity < 50% 135.0% Fail
  Current Ratio > 1.3 3.54 Pass
Opportunities Return on Equity > 15% 107.8% Pass
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   5 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative normalized earnings. Total score = number of passes.

Since we looked at Elan last year, the drugmaker has picked up two points. Higher net margins and returns on equity gave the stock its score boost, but most of those gains came from a one-time asset sale that masked continued operating weakness.

Elan was a huge performer last year, with its stock rising 140%. The company's primary revenue comes from its multiple sclerosis drug Tysabri, which it splits with Biogen Idec (Nasdaq: BIIB). The drug has raised some concerns about side effects, but with the FDA having agreed to a proposal from the companies on how to manage side-effect risk, those concerns have started to subside.

Looking forward, though, Elan retains only a small interest in its most advanced Alzheimer's disease drug prospect, with 75% of the rights to bapineuzumab belonging to Pfizer (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ). The drug is in phase 3 trials and has promise, but regardless, Elan won't get the full rewards even if the drug is successful.

Elan generated a bunch of cash when it sold its Elan Drug Technology unit to Alkermes (Nasdaq: ALKS) last year. On top of getting $500 million in cash, Elan also received about a 25% stake in Alkermes stock.

To reach perfection, Elan needs to keep moving forward in its quest toward becoming profitable. The company has already taken big strides to get its debt under control, but it really needs Tysabri and bapineuzumab to do well. Only if that happens will Elan start looking like a perfect stock.

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.

Elan could generate some strong results, but we think we've got some safer long-term plays. Take a look at the Fool's latest special report (it's absolutely free!) to get some more good stock ideas. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.

Click here to add Elan to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and Pfizer, as well as creating a diagonal call position in 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.