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 Geron 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 Geron.
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 negligible revenue and negative earnings. Total score = number of passes.
Since we looked at Geron last year, the company hasn't been able to earn back the point it lost from 2010 to 2011. The stock has had some wild swings, but overall, its current price is close to where it was this time last year.
Geron came into 2012 with a new perspective. The biotech decided last year to give up on stem-cell research in an effort to eliminate some of the controversies that have sent its shares, as well as those of peers Pluristem Therapeutics and Cytori Therapeutics , moving violently in recent years. Trying to capitalize on the oncology market seemed like a safer bet by comparison.
Unfortunately, things haven't worked out that way. In August, Geron soared on optimism about its cancer therapies. Yet that move only set up Geron for a fall a month later, when the biotech announced that lead cancer drug imetelstat had failed a phase 2 breast cancer trial. Then just last week, Geron said it would stop developing its GRN1005 brain cancer drug and reduce staff by 40% to cut costs.
Meanwhile, the company is still trying to find a buyer for its stem-cell unit. Geron has a non-binding deal with BioTime for the division, but with speculation that Teva Pharmaceutical or another big pharma stock could make a competing bid, Geron is hoping to get some cash to further its own research.
For Geron to improve, it needs to push imetelstat through the FDA approval process for at least some indication of cancer. Without that, the company seems doomed to stay far from 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 Geron Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.
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