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 France Telecom (NYSE: FTE ) 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 France Telecom.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(1.1%)||Fail|
|1-Year Revenue Growth > 12%||1.5%||Fail|
|Margins||Gross Margin > 35%||42.0%||Pass|
|Net Margin > 15%||10.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||116.7%||Fail|
|Current Ratio > 1.3||0.64||Fail|
|Opportunities||Return on Equity > 15%||12.5%||Fail|
|Valuation||Normalized P/E < 20||9.31||Pass|
|Dividends||Current Yield > 2%||9.8%||Pass|
|5-Year Dividend Growth > 10%||7.0%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just three points, France Telecom doesn't have a good connection with shareholders. The telecom pays an impressive dividend, but growth hasn't been in the cards for the company lately.
France Telecom looks a lot like stateside telecoms AT&T (NYSE: T ) and Verizon (NYSE: VZ ) : a strong dividend yield and reasonable valuations, but fairly lofty debt levels and only mediocre growth. But with the health of Europe's economy in doubt, France Telecom has seen revenue contract over the past five years. Even European competitors such as Telefonica (NYSE: TEF ) and Vodafone (NYSE: VOD ) haven't seen such sluggish growth.
Also, new competition in the company's core French market may force its margins to fall. In order to retain market share in the face of competitor Iliad's debut, France Telecom will likely cut prices, threatening future growth.
In today's income-starved investing environment, a stock with a yield near 10% is nothing to sneeze at. That's fine if you're satisfied with collecting healthy payouts. But don't count on France Telecom adding a lot of capital appreciation on top of that dividend -- and without growth, it isn't going to become a perfect stock anytime soon.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.