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 Sequenom, Inc. (NASDAQ:SQNM) 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:
- 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 Sequenom.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 13.6% | Fail |
| 1-year revenue growth > 12% | 32% | Pass | |
| Margins | Gross margin > 35% | 34.2% | Fail |
| Net margin > 15% | (148.9%) | Fail | |
| Balance sheet | Debt to equity < 50% | 198.4% | Fail |
| Current ratio > 1.3 | 5.16 | Pass | |
| Opportunities | Return on equity > 15% | (114.2%) | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 2 out of 9 |
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Sequenom last year, the company has dropped three points, reversing course from its one-point gain from 2011 to 2012. Margins fell and the company added a huge amount of debt, and the shares didn’t respond well, falling about 10% over the past year.
Sequenom remains a major player in the genetic analysis and testing business. Its MaterniT21 PLUS prenatal test for Down syndrome has become a major driver of its overall revenue, even though genetic analysis still made up a majority of its revenue during the first three quarters of 2012. Getting a favorable recommendation from the American College of Obstetricians and Gynecologists for the test is a potentially huge sales driver.
The big question, though, is when Sequenom will get major insurance carriers to cover the cost of the test. Coventry Health Care, Inc. (NYSE:CVH) changed its mind about covering the test last May. Without coverage, it will be hard for Sequenom to reach its full revenue potential.
Last month, Sequenom provided preliminary figures for its fourth quarter and the full 2012 year. Despite showing strong revenue growth, Sequenom’s stock plunged on news that rival Illumina, Inc. (NASDAQ:ILMN) would acquire privately held Verinata Health. Verinata has its own prenatal test for Down syndrome that competes against MaterniT21, and Sequenom investors fear that competitive pressure could lead to longer delays before it turns consistently profitable. With Amgen, Inc. (NASDAQ:AMGN)‘s recent purchase of deCODE Genetics, Sequenom will continue to face new rivals in the space.
For Sequenom to improve, it needs to get its balance sheet under control and find ways to become profitable. With increasingly popular tests, the company certainly has potential to make money if it can establish itself well enough to get every health insurer to pony up for their cost.
The article Has Sequenom 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 Illumina.
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