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 Onyx Pharmaceuticals (NAS: ONXX) 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 Onyx 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%
4 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With a score of 4, Onyx Pharmaceuticals hasn't hit perfection just yet. But the small biotech company has gotten a lot of positive news lately that could push it in that direction.
For a fledgling biotech, Onyx actually has a great pipeline. Its blockbuster cancer drug, Nexavar, gives the company most of its revenue, but it also has the multiple-myeloma fighting carfilzomib in trials for several indications. That combination is perfect for Onyx because its approved drug provides cash flow for further development. In addition, it makes Onyx the fastest-growing biotech stock over the past five years, beating out even Dendreon (NAS: DNDN) and Spectrum Pharmaceuticals (NAS: SPPI) .
In the past month, Onyx has gotten two great boosts. A couple of weeks ago, the company settled a lawsuit with Bayer over Nexavar. Because the drug is responsible for pretty much all of Onyx's revenue, the settlement not only freed up uncertainty about Nexavar's future but also will give Onyx $160 million from Bayer in exchange for the rights to market the drug in Japan. Now, the partners can focus on fighting Pfizer (NYS: PFE) and its rival drug, Sutent. Then, earlier this week, Bayer announced that the Onyx-developed drug regorafenib significantly increased survival rates for colorectal cancer in a phase 3 trial study.
Onyx doesn't have the field to itself, of course. With Pfizer, Novartis (NYS: NVS) , and Aveo Pharmaceuticals (NAS: AVEO) developing kidney-cancer drugs that could eventually rival Nexavar's success, the future is far from certain. But if things keep going well for the company, Onyx could easily get a lot closer to perfection in the near future.
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 Dendreon. Motley Fool newsletter services have recommended buying shares of Pfizer and Novartis. 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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