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, Inc. (NASDAQ:GILD) fits the bill.
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:
1). 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.
2). Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
3). 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.
4). Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
5). 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.
6). 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 Co. (NYSE:BMY) 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, Inc. (NASDAQ:IDIX) 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 Incorporated (NASDAQ:VRTX) and Merck & Co., Inc. (NYSE:MRK) , 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.
The article Has Gilead Sciences Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences and Vertex Pharmaceuticals.
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