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 XOMA (NAS: XOMA) 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 XOMA.
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%
2 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at XOMA last year, the company has kept its two-point score. Things haven't gone perfectly for the biotech, but the future still shows at least some promise.
XOMA has a long history behind it, with much of its past revenue coming from contract research and development and licensing. Although the company has worked for giants Merck (NYS: MRK) and Novartis (NYS: NVS) in the past, the bulk of XOMA's revenue in 2011 came from privately held Servier and the National Institute of Allergy and Infectious Diseases.
XOMA's growth potential, though, comes from its XOMA-052 developmental drug, now known as gevokizumab. The drug is designed to inhibit a protein that's involved in diseases ranging from diabetes and gout to arthritis and cardiovascular disease. Unfortunately, trials involving diabetes didn't go as well as the company had hoped, but possible indications for other diseases still leave the door open to gevokizumab becoming a driver of future revenue for the company.
Recently, XOMA raised about $40 million in a stock offering, but shares rallied on reports that health-care hedge fund Baker Brothers were major buyers of shares. Then, when the company discussed its most recent quarterly results, XOMA indicated its intent to focus on eye diseases for gevokizumab, allowing the company to streamline its operations and cut costs to allow its new funding to last for about two years.
Unfortunately, XOMA faces competition from Regeneron Pharmaceuticals (NAS: REGN) and Novartis in the inhibitor space. But if XOMA's new strategy of focusing on very specific diseases pays off with approvals, the company could quickly get itself moving toward profitability -- and see its score skyrocket in response.
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 in this article. Motley Fool newsletter services have recommended buying shares of Novartis. 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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