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 3SBio (NAS: SSRX) 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 3SBio.
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 3SBio last year, the company has kept the same six-point score. The Chinese biotech company has slumped for much of the year but recently saw a big spike in its shares.
3SBio makes biogenerics, the biotech equivalent of generic pharmaceuticals. But unlike Teva Pharmaceutical (NAS: TEVA) and Mylan (NAS: MYL) , which can largely rely on simple chemistry in making generic versions of ordinary drugs, 3SBio and other biogenerics makers face additional complications in copying biotech treatments. 3SBio's presence in China gives it an advantage over peers that have to worry about the FDA and other U.S. regulatory oversight.
3SBio saw its shares drop by about half between last summer and the beginning of 2012. Although the company has had consistent sales growth, concerns about the Chinese equivalent of the FDA asking for more patient data on its carcinoma drug NuLeusin likely prompted some of the decline.
But 3SBio has had some big news lately. Last week, the company announced a collaboration with DaVita (NYS: DVA) to help treat chronic kidney disease in two provinces in northeast China. 3SBio will contribute 30% of the total $20 million investment from the joint venture. At the same time, the company announced earnings that jumped almost 34% and issued guidance that it expected sales growth of 15% to 25%. The news sent shares soaring.
For 3SBio to sustain lasting improvement, it needs to start looking to boost its returns on equity. Once that's in place, the company may eventually get to the point where it can start paying a dividend and giving shareholders everything they want.
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 owns no shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of 3SBio and Teva Pharmaceutical. 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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