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 Exelixis (NAS: EXEL) 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 Exelixis.
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%
7 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Exelixis last year, the company has vaulted upward by four points. But the shares have tumbled, losing a third of their value in the past year. Why the big disparity?
Exelixis has been waiting a long time to get a drug to market. Now, it looks close, with its cabozantinib drug likely to get approved to treat thyroid cancer, where it will go up against AstraZeneca's (NYS: AZN) Caprelsa.
Less than two months ago, the Food and Drug Administration canceled an advisory committee meeting for cabozantinib. That's not necessarily good or bad news, as Fool contributor Brian Orelli pointed to companies that faced the same situation and came out with different outcomes. Bristol-Myers Squibb eventually got its Yervoy drug approved after an advisory committee cancellation, but another company didn't fare so well.
But the real potential for cabozantinib is in prostate cancer. Despite recent advances from Dendreon (NAS: DNDN) and other companies, Exelixis hopes to hone in on patients that haven't responded well to drugs from Johnson & Johnson (NYS: JNJ) and Medivation (NAS: MDVN) . With results from that trial not expected until the first half of 2014, investors will have to wait quite a while even if the drug gets initial approval.
In the meantime, investors recently got hit by news that the company would do a secondary stock and debt offering to raise cash. Dilution is never good news for shareholders, but in order to finance further research, the company needed capital.
For Exelixis to improve, it needs to get cabozantinib into the win column sooner than later. If the drug can't get FDA approval soon, it could be disastrous for Exelixis' chances of ever reaching perfection.
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.
While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
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The article Has Exelixis Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of AstraZeneca, Dendreon, Exelixis, and Johnson & Johnson. Motley Fool newsletter services recommend Exelixis and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.