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 (NAS: GERN) 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?
|Growth||5-Year Annual Revenue Growth > 15%||2.9%||Fail|
|1-Year Revenue Growth > 12%||7.0%||Fail|
|Margins||Gross Margin > 35%||NM||NM|
|Net Margin > 15%||NM||NM|
|Balance Sheet||Debt to Equity < 50%||1.8%||Pass|
|Current Ratio > 1.3||14.73||Pass|
|Opportunities||Return on Equity > 15%||(75.4%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 7|
Source: S&P Capital IQ. NM = not meaningful; Geron has negligible revenue and substantially negative gross and net profit. Total score = number of passes.
Since we looked at Geron last year, the developmental drug company dropped a point as its revenue growth flattened. In the past month, though, the company made a surprising move that will change its entire strategy going forward.
Geron has a modest pipeline of cancer drugs, including imetelstat, which is currently in phase 2 clinical trials. Earlier this year, the company announced that the FDA had released a clinical hold on one of its earlier stage drugs that could help patients with spinal cord injuries.
Until recently, Geron was perhaps best known for the fact that its research involved developing stem-cell products. That's been a political hot potato for years, as controversy over stem-cell research has pushed shares of Geron and competitors -- like StemCells and Cytori Therapeutics (NAS: CYTX) -- down sharply. Although, other related stocks, including Pluristem Therapeutics (NAS: PSTI) and Aastrom Biosciences (NAS: ASTM) , have held up better.
But last month, Geron said that it was giving up on the stem-cell market. The move will save money in the long run, which should help the company finance the clinical trial studies on its existing drug pipeline. In addition, it may be able to sell the program to a bigger company, such as Teva Pharmaceutical (NAS: TEVA) or Pfizer (NYS: PFE) . However, the move has resulted in Geron having to repay some grant money in the short run.
Looking forward, Geron obviously won't get closer to perfection until its drugs get further along in the clinical trial process. Whether it then continues on its own or becomes an acquisition target for bigger cancer players remains to be seen, but in the meantime, shares are only likely to move as more news on the trials becomes available.
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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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Teva Pharmaceutical. Motley Fool newsletter services have recommended buying shares of Pfizer and Teva Pharmaceutical. 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 a disclosure policy.
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