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 Oncothyreon (NAS: ONTY) 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 Oncothyreon.
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 7
Source: S&P Capital IQ. NM = not meaningful due to zero revenue and negative earnings. Total score = number of passes.
Since we looked at Oncothyreon last year, the company has dropped two points. With revenue having completely evaporated, it's particularly hard to evaluate it on this scale, but a share price decline of more than 40% over the past year also shows the difficulties the company has had.
Oncothyreon is trying to solve lung cancer by following a tried-and-true method of inhibiting carcinogenic proteins. Just as Dendreon's (NAS: DNDN) Provenge fights prostate cancer and Bristol-Myers Squibb (NYS: BMY) has a melanoma treatment in Yervoy, Oncothyreon's Stimuvax uses a patient's immune system to go after a particular MUC-1 protein that causes certain types of lung cancer. With help in producing the drug from drug-delivery specialistBaxter International (NYS: BAX) , Oncothyreon has made many investors optimistic that Stimuvax could be a game-changer.
But in March, Oncothyreon got bad news when an independent data-monitoring committee recommended continuing its phase 3 trial of Stimuvax through 2013. That sent shares plunging, as the company had expected the trial to produce meaningful results this year.
More recently, though, the independent data monitoring committee looked at its Reolysin drug and also advised continuing its phase 3 trial. That proved to be good news, as the head- and neck-cancer treatment could provide another chance for Oncothyreon to profit in the long run.
For Oncothyreon to improve, it obviously needs to get at least one of its treatments approved so that revenue can start coming in. Until that happens, the stock will be extremely speculative.
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. The Motley Fool owns shares of Dendreon. 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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