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 Pharmacyclics (NAS: PCYC) 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 Pharmacyclics.
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 8
Source: S&P Capital IQ. NM = not meaningful; Pharmacyclics had negative earnings over the past 12 months that greatly exceeded total revenues. Total score = number of passes.
With four points, Pharmacyclics has a couple of things going for it. Although the developmental-stage biotech company still hasn't seen sales take off, a recent deal with a pharma giant may be just what the doctor ordered for the stock.
Pharmacyclics has struggled for years trying to develop a drug that would receive FDA approval, with no success. Earlier this year, though, investors got excited by the company's blood-cancer treatment PCI-32765, which had positive early phase clinical study results in treating leukemia and lymphoma. As often happens, the attention fed on itself, with institutional investors adding big share purchases of Pharmacyclics stock during the third quarter, along with shares of Seattle Genetics (NAS: SGEN) , Jazz Pharmaceuticals (NAS: JAZZ) , and Cubist Pharmaceuticals (NAS: CBST) .
Last week, Pharmacyclics announced a licensing deal whereby a unit of Johnson & Johnson (NYS: JNJ) agreed to pay the company an upfront $150 million, along with potential milestone payments down the road that could add as much as $825 million to the deal if PCI-32765 gets approval for different types of cancer. Although analysts downgraded Pharmacyclics, the potential of the J&J deal is huge compared to the current valuation investors are putting on the shares.
The deal does leave Pharmacyclics responsible for a substantial part of development costs, so for the stock to reach perfection, PCI-32765 or its other early-stage drugs need to pay off for the company. If they do, though, then the sky's the limit for Pharmacyclics.
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 and creating a diagonal call position on 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.