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 Visa (NYSE: V ) 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 Visa.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||24.3%||Pass|
|1-Year Revenue Growth > 12%||12.9%||Pass|
|Margins||Gross Margin > 35%||83.7%||Pass|
|Net Margin > 15%||13.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||1.39||Pass|
|Opportunities||Return on Equity > 15%||5.2%||Fail|
|Valuation||Normalized P/E < 20||24.07||Fail|
|Dividends||Current Yield > 2%||0.6%||Fail|
|5-Year Dividend Growth > 10%||20.3%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Visa last year, the company gave back the two points it picked up between 2010 and 2011. The stock's nearly 60% rise took valuations above comfortable levels, while net margins plunged.
As the largest credit card network, Visa has been at the forefront of the revolution in how people pay for things over the past several decades. With credit cards and, more recently, debit cards having become increasingly popular over checks and cash transactions, Visa has put itself in position to take a small cut of the trillions of dollars that people around the world spend every year. Moreover, it has maintained its substantial lead over perennial No. 2 MasterCard (NYSE: MA ) .
But the world isn't standing still, as competitors rally around mobile payment processing and other innovative payment methods. Discover Financial (NYSE: DFS ) and eBay's (Nasdaq: EBAY ) PayPal have teamed up to offer PayPal-based payments at any merchant that accepts Discover's cards, which should help both companies become a bigger threat to Visa. Although the company has joined forces with card-network rivals MasterCard, Discover, and American Express (NYSE: AXP ) as part of a Mobile Payments Committee to fight off non-card-based competition, Visa has already demonstrated its strength in the mobile area, as a recent research report showed that Visa is the top consumer choice for mobile wallets.
One controversial area remains the merchant fees that Visa charges. Visa and MasterCard made a settlement offer recently that included billions in payments to merchants, as well as giving them the right to add surcharges to credit card transactions. But some major retailers have urged their peers to reject the offer, and with alternatives like upstart Square popping up and gaining traction, Visa needs to be careful not to take its dominance for granted.
For Visa to improve, it needs to get margins moving back in the right direction. Mobile payments could achieve that end, but only if Visa can fight back against the competition and demonstrate its industry leadership once more.
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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