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 Celgene
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 Celgene.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 40.0% | Pass |
| 1-Year Revenue Growth > 12% | 33.5% | Pass | |
| Margins | Gross Margin > 35% | 90.1% | Pass |
| Net Margin > 15% | 27.2% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 33.0% | Pass |
| Current Ratio > 1.3 | 2.83 | Pass | |
| Opportunities | Return on Equity > 15% | 22.9% | Pass |
| Valuation | Normalized P/E < 20 | 39.04 | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Celgene last year, the company has kept the same seven-point score. The company has kept a healthy growth rate and boosted its returns on equity, but its valuation remains high, and it still doesn't pay a dividend.
Celgene stands out within the biotech industry for having a number of approved therapies and drugs that doctors use to fight cancer and immune-related diseases. Its Revlimid cancer treatment made up almost two-thirds of its revenue in 2011, although sales of the tumor-targeting drug Abraxane, which Celgene acquired in its buyout of Abraxis in late 2010, have ramped up quickly.
Another advantage that Celgene has among health-care stocks is patent protection. Pfizer
For Celgene to pick up those final few points, the obvious answer is to initiate a dividend. Amgen
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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