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 Affymetrix (NAS: AFFX) 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 Affymetrix.
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%
3 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Affymetrix last year, the company hasn't improved on its three-point showing. But investors have gotten restless as the stock has dropped 30% in the past year.
Affymetrix is a player in the contentious genetic testing industry. With products including biochip technology to perform tests and a genome-measuring system, Affymetrix has staked its claim in a hot market.
But competition has been fierce in the industry for a long time. In early 2008, Affymetrix settled with Illumina (NAS: ILMN) , receiving $90 million to end a patent dispute. The settlement included a promise that Affymetrix wouldn't initiate new lawsuits for four years, but with that period now having run, it'll be interesting to see if new litigation arises.
The problem is that it's hard to distinguish the techniques various companies use. Illumina suedLife Technologies (NAS: LIFE) earlier this year, alleging that Life's Ion Torrent subsidiary uses genome sequencing technology that's too close to Illumina's. Last year, Life Technologies lost a dispute with Pacific Biosciences (NAS: PACB) over different technology involving single-molecule sequencing.
For now, though, Affymetrix hasn't been able to deliver genome sequencing machines that are as cheap and accurate as Life Technologies'. If Affymetrix wants to improve, it needs to come up with more competitive products. If it does, though, Affymetrix could soar as the industry has plenty of potential for big gains.
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 Illumina and Pacific Biosciences. 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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