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 Verizon (NYSE: VZ ) 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 Verizon.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8%||Fail|
|1-Year Revenue Growth > 12%||(1.4%)||Fail|
|Margins||Gross Margin > 35%||60%||Pass|
|Net Margin > 15%||3.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||68.9%||Fail|
|Current Ratio > 1.3||0.91||Fail|
|Opportunities||Return on Equity > 15%||12.9%||Fail|
|Valuation||Normalized P/E < 20||9.83||Pass|
|Dividends||Current Yield > 2%||5.5%||Pass|
|5-Year Dividend Growth > 10%||3.6%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Verizon can't claim perfection with a score of only 3. The stock has the dividends that investors want, but growth hasn't come with it.
From one perspective, you'd think that recent times would be better for Verizon. The company finally nosed in on rival AT&T (NYSE: T ) and its cozy relationship with iPhone maker Apple (Nasdaq: AAPL ) , earning the right to sell its own version of the iPhone 4. Moreover, growth from partners like Motorola Mobility (NYSE: MMI ) and other Android-based phone makers seems to be continuing, potentially boosting Verizon's prospects.
But remember that the wireless division is only part of Verizon's business -- and one in which it shares profits with Vodafone (Nasdaq: VOD ) . Although the company has sold many of its landline assets to Frontier Communications (NYSE: FTR ) , what remains still produces substantial cash flow for the company. Moreover, the company competes against cable operators like Comcast (Nasdaq: CMCSA ) for Internet, voice, and TV bundles -- bundles that can be very lucrative for the companies involved.
The biggest challenge for Verizon is arguably AT&T's proposed takeover of T-Mobile. The move would put a serious dent in Verizon's plans to dominate the industry. AT&T already enjoys higher returns on equity and far better net margins than Verizon. That situation is only likely to get worse if the T-Mobile merger goes through.
It's hard to look a dividend of more than 5% in the mouth. But with telecoms across the globe all having attractive yields, you don't have to settle for second-best. Wait for Verizon to get closer to perfection before pulling the trigger.
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."