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 Bristol-Myers Squibb (NYS: BMY) 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 Bristol-Myers Squibb.
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%
7 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Bristol-Myers Squibb last year, the drugmaker has kept the same seven-point score. Yet the company is another year closer to losing patent protection on one of its biggest drugs.
Bristol's big product is Plavix, which is a blood thinner that it sells with Sanofi (NYS: SNY) . Plavix represents about a third of Bristol's revenue, but Bristol and Sanofi will lose exclusivity on the drug's sales this year.
In order to counter the loss of Plavix revenue, Bristol has acted aggressively to bolster its pipeline. Early last year, the company got approval for its Yervoy melanoma treatment, whose high price tag could bolster sales significantly. Moreover, it looks likely that Eliquis, the atrial fibrillation treatment it developed with Pfizer (NYS: PFE) , will get approved this year and stands ahead of the competition.
In even bigger news, Bristol bought out hepatitis-C drugmaker Inhibitex in a $2.5 billion deal. Coming on the heels of Gilead Sciences' (NAS: GILD) much more expensive takeout of Pharmasset, Bristol's move keeps it competitive in the hep-C space. Yet critics wonder if paying so much for an early-stage drug was truly smart.
For Bristol to keep improving, it will need to use these new drugs and others to boost its revenue further. But with a reasonable valuation and an attractive dividend yield, Bristol certainly has the capacity to become a perfect stock.
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.
Bristol-Myers Squibb isn't perfect yet, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click hereto add Bristol-Myers Squibb to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Gilead Sciences and Pfizer. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.