Has Gilead Sciences Become the Perfect Stock?

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 Gilead Sciences 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 Gilead Sciences.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

18.1%

Pass

 

1-year revenue growth > 12%

15.7%

Pass

Margins

Gross margin > 35%

74.5%

Pass

 

Net margin > 15%

26.7%

Pass

Balance sheet

Debt to equity < 50%

77.7%

Fail

 

Current ratio > 1.3

1.42

Pass

Opportunities

Return on equity > 15%

31.4%

Pass

Valuation

Normalized P/E < 20

27.01

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Gilead Sciences last year, the company has stayed stuck at six points, unable to regain the point it lost from 2011 to 2012. But the stock has soared more than 50% over the past year on enthusiasm about its future prospects.

One of the biggest growth areas for Gilead over the past year came from its massive acquisition of Pharmasset just over a year ago. With its GS-7977/sofosbuvir drug for treating hepatitis C, Gilead has taken the lead in the hep-C market, as other players have suffered some dramatic flameouts. Bristol-Myers Squibb made its own big hep-C acquisition, but the experimental drug turned out to cause one patient death and complications with others, forcing the company to drop development. Meanwhile, Idenix Pharmaceuticals had two of its hep-C prospects put on clinical holds back in November due to safety concerns, and Idenix said earlier this week that it would not continue clinical development programs for the IDX184 and IDX19368 drug candidates.

By contrast, sofosbuvir has demonstrated strong results, and the fact that it's an all-oral treatment bodes well for its competitive prospects against interferon-reliant treatments from Vertex Pharmaceuticals and Merck , which require intravenous administration and can cause flu-like symptoms for nearly a year during treatment. With two phase-3 trials succeeding in hitting primary endpoints, sofosbuvir is setting up to be a big part of Gilead's future.

In its most recent quarter, Gilead again demonstrated the power of its HIV/AIDS treatments while showing a pathway to future growth in other areas. Strong growth from the oncology and cardiovascular areas are dovetailing well with the company's overall strategy and show few signs of letting up.

For Gilead to improve, it needs to work on getting its debt levels down a bit while translating its growth prospects into higher earnings. That won't get it to perfection, but it'll be a big step in Gilead's steady climb to prominence in the industry.

Keep searching
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.

Unlike Gilead, Merck has been staring down the barrel of the patent cliff for years. Now that it has finally lost some of its blockbusters, is Merck worth buying, or should you stay away from the stock. Let senior biotech analyst Brian Orelli, Ph.D., walk you through both the opportunities and threats facing Merck. His in-depth report also comes with a full 12 months of updates. Claim your copy now by clicking here.

Click here to add Gilead Sciences to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has Gilead Sciences Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences and Vertex 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.

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