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 Amylin Pharmaceuticals (NAS: AMLN) 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 Amylin 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%
2 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With only two points, Amylin Pharmaceuticals doesn't make a very healthy showing. The company has an approved drug in its stable, but it needs to push harder for new drugs if it wants to keep its momentum.
Two years ago, the FDA approved the diabetes drug Byetta as a stand-alone monotherapy. But despite its efficacy as a treatment for the disease, one problem with Byetta is that patients have to inject it twice a day. With oral medications from rivals Merck (NYS: MRK) , Bristol-Myers Squibb (NYS: BMY) , and AstraZeneca (NYS: AZN) , Byetta has had a tough time gaining traction.
To remedy that, Amylin turned to Alkermes (NAS: ALKS) , which has a time-release technology that makes fewer injections possible. The company hopes to have a once-weekly version of Byetta, called Bydureon, on the market within the next year. That should help it beat out Novo Nordisk (NYS: NVO) , whose once-daily drug Victoza has taken some of Amylin's market share.
But Amylin has had to fight battles even with its own marketing partner. Eli Lilly (NYS: LLY) agreed to market a rival diabetes drug, Tradjenta, and Amylin took Lilly to court to block the agreement. In May, Amylin succeeded in getting a temporary restraining order against Lilly, but the stakes are still high for the smaller Amylin.
Amylin's future success depends on victory in the diabetes arena. If Bydureon can succeed in taking business away from Novo and other competitors, then Amylin should be able to dig itself out of its current hole.
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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