Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Research In Motion (Nasdaq: RIMM ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Research In Motion.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||58%||pass|
|1-Year Revenue Growth > 12%||27.8%||pass|
|Margins||Gross Margin > 35%||44.6%||pass|
|Net Margin > 15%||17.2%||pass|
|Balance Sheet||Debt to Equity < 50%||0%||pass|
|Current Ratio > 1.3||1.98||pass|
|Opportunities||Return on Equity > 15%||40.9%||pass|
|Valuation||Normalized P/E < 20||12.56||pass|
|Dividends||Current Yield > 2%||0%||fail|
|5-Year Dividend Growth > 10%||0%||fail|
|Total Score||8 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 8, Research In Motion comes pretty close to perfection, lacking only shareholder dividends. Yet while these statistics show how successful Research in Motion's past has been, the company's future seems a lot less certain right now.
Although you might not know it from all the hype that Apple's (Nasdaq: AAPL ) iPhone has gotten, Research In Motion's BlackBerry smartphone line still commands the U.S. market, with market share of 37.3%. That's largely because businesses still gravitate heavily toward using BlackBerry phones.
But competitors may be starting to erode that corporate dominance. According to Apple, as many as 80% of Fortune 500 companies are testing iPhones for corporate use. Motorola (NYSE: MOT ) and Dell (Nasdaq: DELL ) are also aiming smartphone products to business customers.
Meanwhile, Research In Motion gave Apple nearly a year's head start in the tablet space, and some have been disappointed with its PlayBook offering. Relying on the traditional reluctance of big companies to adopt new technology is a dangerous game for Research In Motion to play.
To be a perfect stock, a company not only has to put up a proven record of strong performance but also must show that it can preserve that record into the future. Research In Motion has the enviable track record so many other companies lack, but sustaining its dominance in an increasingly competitive space will prove much harder.
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.