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 Optimer Pharmaceuticals (NAS: OPTR) 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 Optimer Pharmaceuticals.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
5 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With five points, Optimer Pharmaceuticals finishes in the middle of our scale. But the company has plenty of prospects, and it recently moved one step closer to realizing its full potential.
Optimer is the company behind the antibiotic drug Dificid, which treats an infection called clostridium difficile-associated diarrhea. Along with marketing partnerCubist Pharmaceuticals (NAS: CBST) , Optimer launched the drug early in the third quarter of 2011 and said in September that it had racked up about $3.9 million in sales in its first six weeks.
The challenge, though, is that doctors already have another drug, ViroPharma's (NAS: VPHM) Vancocin, to treat the same infection. But earlier this week, Optimer revealed some good news: In a retrospective analysis of the drug's phase 3 study, Dificid showed superior results early in the treatment cycle compared with Vancocin. With a Wall Street analyst piping in with further positive comments, the company saw shares jump almost 10% on Thursday.
Another positive sign for the stock is insider activity. Although several stocks in the industry have seen recent insider buying, including Valeant Pharmaceuticals (NYS: VRX) , Impax Labs (NAS: IPXL) , and ViroPharma, Optimer has one of the smallest market caps of the group -- and plenty of potential for future gains.
For Optimer, everything rests on the continuing rollout of Dificid as well as its other major pipeline drug, Pruvel. If the small biotech company can hit pay dirt on its drugs, then it could continue its huge growth swing to get a lot closer to perfection in the months and years ahead.
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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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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.
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