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 ICON (NAS: ICLR) 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 ICON.
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 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at ICON last year, the company has lost two points. But shareholders aren't too disappointed with the stock's 15% rise in the past year.
ICON continues to work in the promising field of pharmaceutical contract research, with strategic agreements to run trials for a variety of well-known big pharma names, including Pfizer (NYS: PFE) and Bristol-Myers Squibb (NYS: BMY) . By using ICON, these companies look to save time and money versus running trials themselves, gaining efficiency and greater objectivity versus staying in-house.
The field has attracted attention from private equity investors. With Carlyle Group having bought out ICON rival Pharmaceutical Product Development, continuing consolidation could put ICON's shares in play.
But ICON has had trouble on the earnings front. During the first quarter, profit slid 30% due to higher expenses. Then, in the second quarter, ICON fell short of expectations, with a substantial charge to cover the costs of restructuring.
The arguments are no less compelling for ICON now than they have been for a while. If the trend toward drug development outsourcing continues, then ICON should be able to stand up to rivals Covance (NYS: CVD) and Charles River Labs (NYS: CRL) and get its share of the pie.
Still, for ICON to improve, it needs those financial benefits to start showing up in its bottom line. Until it does, Charles River and Covance will look much more attractive by several metrics, and ICON will have a lot of trouble becoming 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 out the best investments from the rest.
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The article Has ICON Become the Perfect Stock? originally appeared on Fool.com.
Fool contributorDan Caplingerdoesn't own shares of the companies mentioned. 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 adisclosure policy.
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