Has Onyx Pharmaceuticals 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 Onyx Pharmaceuticals (NAS: ONXX) 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 Onyx Pharmaceuticals.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

439.4%

Pass

 

1-Year Revenue Growth > 12%

39.3%

Pass

Margins

Gross Margin > 35%

34.4%

Fail

 

Net Margin > 15%

3.8%

Fail

Balance Sheet

Debt to Equity < 50%

23.8%

Pass

 

Current Ratio > 1.3

4.34

Pass

Opportunities

Return on Equity > 15%

2.6%

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

4 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative normalized earnings. Total score = number of passes.

Since we looked at Onyx Pharmaceuticals last year, the company has held onto its four-point score. The stock, though, has rocketed forward, rising more than 125% over the past year.

This time last year, Onyx was already in the enviable position of having an approved drug, Nexavar, as well as a promising pipeline. Yet after playing the waiting game for quite a while, the stock went off to the races in June, when Onyx's Kyprolis got a unanimous 11-0 recommendation for FDA approval from an advisory committee. A month later, the FDA formally approved Kyprolis for use in treating multiple myeloma in certain patients who had failed at least two prior therapies. Then, last month, Onyx got another drug, Stivarga, approved to treat metastatic colorectal cancer.

Onyx's success has had collateral effects on other industry players. Ligand Pharmaceuticals (NAS: LGND) also moved higher, as it's Onyx's royalty partner and makes the key ingredient in Kyprolis. But Celgene (NAS: CELG) , which makes competing drug Revlimid, fell on Kyprolis' approval, and also took a hit on concerns about Revlimid's link to other types of cancer.

Onyx hasn't had a perfect year, though. AVEO Pharmaceuticals' (NAS: AVEO) tivozanib drug showed better progression-free survival rates than Nexavar, raising the threat of competition as soon as next year if it gets FDA approval. Moreover, in July, Onyx said that a trial testing a combination of Nexavar and Roche's Tarceva failed to show improvement in overall survival in liver cancer patients versus using Nexavar alone. But with Bristol-Myers Squibb (NYS: BMY) also suffering a setback with its liver-cancer drug brivanib, the Tarceva disappointment shouldn't be fatal to Onyx's future prospects.

For Onyx to improve, it will need to do a good job of marketing its new drugs while navigating the market to find the optimal price to sell them.

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.

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.

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

Editor's note: A previous version of this article failed to specify precisely the results of the tivozanib and Tarceva trials. The Fool regrets the error.

The article Has Onyx Pharmaceuticals 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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