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 Inhibitex (NAS: INHX) 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 Inhibitex.
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 8
Source: S&P Capital IQ. NM = not meaningful due to negative earnings that substantially exceeded total revenue. Total score = number of passes.
With a score of 5, Inhibitex actually does pretty well for a small company. The young biotech has shot up recently on promising news for its main drug.
As with most small biotechs, Inhibitex's success or failure largely rests on a single drug. For Inhibitex, that drug is INX-189, a treatment for hepatitis C. That's a crowded space, with Gilead Sciences (NAS: GILD) and Idenix Pharmaceuticals (NAS: IDIX) having drugs in development. Moreover, Pharmasset (NAS: VRUS) has partnered with giantsBristol-Myers Squibb (NYS: BMY) and Johnson & Johnson (NYS: JNJ) .
But unlike many biotechs, Inhibitex has gotten some unquestionably positive news lately. The company announced that INX-189 turned in unexpectedly good trial results. Although Vertex Pharmaceuticals (NAS: VRTX) arguably has the lead in the space, Inhibitex's all-oral treatment would be a big advantage over Vertex's injectable Incivek.
The key to remember, though, is that INX-189 is only in phase 2 trials right now. It still has a long way to go before FDA approval even comes onto the table. Investors who are already treating it like a perfect stock are getting ahead of themselves, but there's no denying that Inhibitex has a great deal of promise.
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 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. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals, Johnson & Johnson, and Gilead Sciences, 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.