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 Spectrum Pharmaceuticals 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 Spectrum Pharmaceuticals.
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%
8 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Spectrum Pharmaceuticals last year, the company has picked up a point, with its valuation having fallen. Yet that valuation drop cost the stock 40% of its value over the past year, and most of it came just yesterday as the company announced some troubling news.
Spectrum has benefited greatly from its Fusilev cancer treatment, which has driven sales growth over the years. Even though a generic version of the drug has been available for a while now, shortages of generic leucovorin have given Fusilev a longer-than-expected period of relatively high sales. As recently as last month, the company had said that it expected revenue to keep rising.
Earlier this week, though, Spectrum said that those favorable conditions are set to change, and the stock plunged nearly 40% in response. Spectrum reduced its sales guidance for 2013 to a range of $160 million to $180 million, far below the $300 million that analysts were expecting. The company cited a drop in expected Fusilev sales by more than half as Sagent Pharmaceuticals has boosted production to alleviate the shortage. Sagent's shares have risen slightly, though not nearly as much as Spectrum's stock has fallen.
Spectrum has other drugs, including non-Hodgkin's lymphoma treatment Zevalin and T-cell lymphoma drug Folotyn, but their sales have been lackluster at best. But Spectrum still seems to believe that Fusilev is its best bet going forward and has been working hard to urge doctors not to shift to generic leucovorin.
For Spectrum to improve, it needs to avoid the sales collapse it now expects to see. The backward-looking numbers make the stock look near-perfect, but a revenue reversal will leave Spectrum much further from perfection next year than it is now.
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.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names 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 Spectrum Pharmaceuticals Become the Perfect Stock? originally appeared on Fool.com.
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