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 Pharmacyclics 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 Pharmacyclics.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

344%

Pass

 

1-year revenue growth > 12%

2,828%

Pass

Margins

Gross margin > 35%

100%

Pass

 

Net margin > 15%

55.3%

Pass

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

11.52

Pass

Opportunities

Return on equity > 15%

66.5%

Pass

Valuation

Normalized P/E < 20

68.73

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

7 out of 10

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

Since we looked at Pharmacyclics last year, the company has seen its score rise by three points, as revenue has soared and the company became profitable. The stock has also more than quadrupled in price over the past year.

Pharmacyclics is a tiny biotech company that has nevertheless attracted a huge amount of attention over the past year. The key to the company is its BTK-inhibitor ibrutinib, which has serious cancer-fighting potential and could challenge Celgene's Revlimid, which is a near-billion-dollar blockbuster treatment for multiple myeloma.

Late in 2011, the company got a big boost when Johnson & Johnson subsidiary Jaansen Pharmaceuticals made a collaborative deal with Pharmacyclics that resulted in an upfront $150 million payment. As a result, Pharmacyclics reported excellent quarterly results that quarter and saw its stock price soar, despite not having any drugs even in phase 3 development at the time, let alone approved. Since then, the company has started a phase 3 trial program, but it'll still be a long time before Pharmacyclics can expect consistent revenue.

More recently, Pharmacyclics has been one of many small companies announcing successes. In two studies released at the American Society of Hematology's annual meeting, Pharmacyclics presented impressive results fighting chronic and small lymphocytic lymphoma. Although Ariad Pharmaceuticals and Geron also presented positive data at the meeting, Pharmacyclics received some of the most optimistic comments from medical pros at the meeting.

For Pharmacyclics to improve, it needs to get its treatments through trials and into the FDA approval process. Once that's done, real revenue can start flowing in, finally giving all the investors that have bid up the company's shares something fundamental to measure their gains against.

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.

Johnson & Johnson is so big that its deal with Pharmacyclics won't move the needle very much. But the health-care conglomerate has a lot going for it. Find out whether J&J is a well-diversified giant that's perfect for your portfolio by checking out our brand-new research report on Johnson & Johnson. It'll give you the full story behind the stock, along with its key opportunities and risks. To claim your copy, simply click here now for instant access.

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

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. 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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