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 Baxter International (NYS: BAX) 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 a 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 Baxter International.
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%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Baxter International last year, the company gave back the point it picked up from 2010 to 2011, as slower dividend growth held its score back. But the stock has performed reasonably well, with a 15% rise over the past year.
Baxter has focused for years on various medical devices and pharmaceuticals targeting blood-related diseases, as well as drug delivery systems and dialysis treatment. That business has produced stable, though slow, growth over the years.
But late last year, Baxter jumped onto one of the biggest recent trends in the industry: partnerships to develop biosimilar drugs. In response to giant Amgen (NAS: AMGN) setting up a deal with Watson Pharmaceuticals and Teva Pharmaceuticals (NYS: TEVA) pairing with Swiss company Lonza, Baxter teamed up with Momenta Pharmaceuticals (NAS: MNTA) for biosimilar development. Just as generics have revolutionized the standard pharmaceutical compound business, biosimilars have the potential to make more-complicated biologic drugs cheaper and more readily available.
In addition, Baxter is joining in the race to fight Alzheimer's. With its Gammagard drug set to complete phase 3 trials next year, it could prove to be a blockbuster for Baxter, if successful.
Still, Baxter has had setbacks. Its partnership with Halozyme (NAS: HALO) got bad news when the FDA turned down its HyQ immunodeficiency disease drug. Although Halozyme got hit hard, Baxter's stock barely budged after the expected news in early August.
For Baxter to improve, its most likely path will be for biosimilar development to take off. Success there could help reawaken growth, and send Baxter closer to perfection in the years to come.
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 Baxter International 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 Momenta Pharmaceuticals. Motley Fool newsletter services recommend Momenta Pharmaceuticals. 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.