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 whether Novartis (NYSE: NVS) fits the bill.

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 that all come together to make up a very attractive picture.

Some of the most basic but 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 Novartis.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 11.6% Fail
  1-Year Revenue Growth > 12% 14.4% Pass
Margins Gross Margin > 35% 72.6% Pass
  Net Margin > 15% 19% Pass
Balance Sheet Debt to Equity < 50% 32.9% Pass
  Current Ratio > 1.3 1.08 Fail
Opportunities Return on Equity > 15% 15.7% Pass
Valuation Normalized P/E < 20 16.31 Pass
Dividends Current Yield > 2% 4.1% Pass
  5-Year Dividend Growth > 10% 18.2% Pass
  Total Score   8 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 8, Novartis does a great job, outperforming most of its peers in the pharmaceutical industry. The company has managed its finances much more efficiently than many of its competitors.

Novartis weighs in with some of the highest margins in the business, contributing to a strong return on equity. By contrast, Pfizer (NYSE: PFE) and Abbott Labs (NYSE: ABT) only achieve net margins in the low teens, and Abbott only manages to outpace Novartis's return on equity by taking on higher debt levels. Merck (NYSE: MRK) trails far behind on both measures.

What you may not realize, though, is that Novartis gives you exposure to a number of other drug-related companies. Novartis owns shares of Roche Holdings as well as a majority stake in Alcon (NYSE: ACL), giving Novartis investors some automatic diversification.

Novartis is also interesting in that it combines new drug development with generic production. Its Onbrez Breezhaler treatment for chronic obstructive pulmonary disease is already approved in the EU and should go before an FDA advisory committee next month. Meanwhile, its Sandoz division sells generics, which typically bring lower margins, but have the benefit of not having a huge dropoff in sales when patents expire.

Novartis faces the same challenges as many drugmakers, but it's doing a better job than some of addressing them. It may not be perfect, but Novartis is definitely a strong player in the pharmaceutical industry.

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 Novartis 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 Caplinger doesn't own shares of the companies mentioned in this article. Novartis is a Motley Fool Global Gains recommendation. Pfizer is a Motley Fool Inside Value recommendation. Motley Fool Alpha owns shares of Abbott Laboratories. 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.