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 Affymax (NAS: AFFY) 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 Affymax.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||32.4%||Pass|
|1-Year Revenue Growth > 12%||(57.6%)||Fail|
|Margins||Gross Margin > 35%||(58.0%)||Fail|
|Net Margin > 15%||(128.6%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||5.44||Pass|
|Opportunities||Return on Equity > 15%||(82.6%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With only three points, Affymax doesn't look like the cure for your portfolio's woes. But the stock has performed well, as the company recently earned a key drug approval.
Affymax got great news last month, when its Omontys anemia drug received FDA approval. With a once-a-month treatment schedule, Omontys is far more convenient for patients than Amgen's (NAS: AMGN) competing product, Epogen, which requires several treatments per week. Johnson & Johnson's (NYS: JNJ) Procrit similarly requires multiple weekly doses. The advantage could give Affymax huge sales potential in the market to serve dialysis patients.
But Amgen plans to make Affymax's road difficult. Amgen signed an exclusive long-term contract with DaVita (NYS: DVA) recently, locking in the country's biggest provider of dialysis services. Although Amgen's contract with Fresenius Medical Care (NYS: FMS) isn't exclusive, it could still make it harder for Affymax to get its foot in the door. And despite the fact that Takeda Pharmaceutical is helping Affymax with marketing, Takeda will also end up taking a cut -- threatening the former's success even as it appears poised on the brink of its breakthrough moment.
Affymax will likely see a huge revenue pop as Omontys comes to market. But for a sustained run toward perfection, Affymax needs to demonstrate its ability to compete successfully with its much larger rivals. Without that, any improvement Affymax sees will be short-lived.
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 Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Johnson & Johnson. 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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