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 Pfizer (NYS: PFE) 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 Pfizer.
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%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Pfizer last year, the company has picked up a point, thanks to a slight reduction in its debt-to-equity ratio. Nevertheless, the pharma giant still faces the challenge of patent expirations that could outpace its pipeline development.
This is the scary moment that Pfizer investors have been dreading: Lipitor is set to go off-patent later this month, opening itself up to generic competition from Watson Pharmaceuticals (NYS: WPI) . After a six-month exclusivity period, other generic-makers like Teva Pharmaceutical (NAS: TEVA) and Mylan (NAS: MYL) may come in and join the fun.
Interestingly, though, Pfizer isn't backing away from the challenge. In an attempt to refocus its attention on drugs, Pfizer plans to sell or spin off the company's nutrition and animal-health businesses. Abbott Labs (NYS: ABT) is reportedly interested in the nutrition segment, but as Merck (NYS: MRK) and Sanofidiscovered earlier this year, the animal-health segment may be harder to divest.
Moreover, it's not as if Lipitor is the only drug Pfizer sells. The company successfully beat off Teva in a challenge to sell generic Viagra; now, generics won't be available until October 2019.
Still, much of Pfizer's near-term success will depend on whether it can sustain its revenue without a proprietary right to Lipitor. With expectations fairly low, just about any positive result could be a big win for shareholders -- and push the stock that much closer to perfection.
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 Teva Pharmaceutical and Abbott Labs. Motley Fool newsletter services have recommended buying shares of Pfizer, Teva Pharmaceutical, and Abbott Labs. 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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