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 Exelixis (NAS: EXEL) 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 Exelixis.
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%
3 out of 7
Source: S&P Capital IQ. NM = not meaningful due to negative shareholder equity or normalized earnings. Total score = number of passes.
With three points, Exelixis isn't giving shareholders the perfect cure for market blues. In fact, the biotech company has taken its investors on a big roller-coaster ride recently.
Exelixis is in the large camp of biotechs that don't have any approved products yet. But after Bristol-Myers Squibb (NYS: BMY) backed out of a partnership with the company last year, Exelixis now has sole rights to a cancer drug called cabozantinib. Although the company has an extensive pipeline of drugs, the primary focus right now is on getting this one drug approved.
Earlier this year, shareholders had to endure a long delay in getting trial results for a study testing cabozantinib for medullary thyroid cancer. But earlier this week, the company finally released positive data in the phase 3 trial. That opens the door for a filing next year for approval of the drug.
That's good news for two reasons. First, an approval for thyroid cancer would get the company making money, where it will go up against AstraZeneca's (NYS: AZN) vandetanib. But more importantly, it would give the company some momentum for its phase 3 trial in treating prostate cancer -- a potentially more lucrative market, although it also has heavy-hitting competition from Dendreon's (NAS: DNDN) Provenge, Sanofi's (NYS: SNY) Jevtana, and Johnson & Johnson's (NYS: JNJ) Zytiga.
Exelixis is still a long way from perfection, but it's making baby steps. Given enough patience, shareholders may well end up hitting the jackpot with Exelixis if cabozantinib reaches its full potential.
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. The Motley Fool owns shares of Johnson & Johnson, Exelixis, and Dendreon. Motley Fool newsletter services have recommended buying shares of Exelixis and Johnson & Johnson, 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.
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