Is EMC the Perfect Stock?

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 EMC (NYSE: EMC  ) 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 EMC.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 11.7% fail
  1-Year Revenue Growth > 12% 16.4% pass
Margins Gross Margin > 35% 58.2% pass
  Net Margin > 15% 10.2% fail
Balance Sheet Debt to Equity < 50% 18.9% pass
  Current Ratio > 1.3 1.91 pass
Opportunities Return on Equity > 15% 10.5% fail
Valuation Normalized P/E < 20 32.28 fail
Dividends Current Yield > 2% 0% fail
  5-Year Dividend Growth > 10% 0% fail
       
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 4, EMC doesn't have everything we're looking for in a stock. But it's certainly in the middle of some exciting times in its industry.

On one hand, EMC recently announced a bid for Isilon Systems (Nasdaq: ISLN  ) , paying $33.85 per share in cash for the networked storage specialist. The move fits in with an overall corporate strategy that emphasizes acquisitions as a way to grow.

But even as EMC gobbles up smaller companies, the storage company itself is the subject of takeover speculation. Rumors have it that Oracle (Nasdaq: ORCL  ) may make a bid for the company, and fellow Fool Anders Bylund thinks that Cisco Systems (Nasdaq: CSCO  ) could be another logical choice to buy EMC out.

Perhaps the most interesting thing about EMC from an investing standpoint is that it essentially gives you two companies in one. EMC owns about 80% of VMware (NYSE: VMW  ) , so you get not only EMC's storage business but also VMware's virtualization software.

Unfortunately, all the attention has made EMC's shares somewhat pricey. Like many tech stocks, it doesn't pay a dividend, and its net margins and return on equity aren't all that great. But as a play on the cloud computing trend or continued consolidation in the industry, EMC is worth a closer look.

Keep searching
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.

Click here to add EMC to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. VMware is a Motley Fool Rule Breakers selection. The Fool has a bull call spread position on Cisco Systems and owns shares of Oracle. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 15, 2010, at 5:36 PM, seandoc wrote:

    Why did you not recommend EMC when it was 10 dollars 2yrs ago,and VMW 26 dollars.I pass their

    european headquarters each day going to work,and couldnt resist buying. How could I lose.

    You have missed the boat.

  • Report this Comment On December 19, 2010, at 1:46 PM, joshbianco wrote:

    Im new to investing so I'm wondering where you're finding some of these numbers. I'm familiar with looking up some of them on Yahoo Finance, but where do you find the Gross Margin, Debt to Equity, and Current Ratio figures?

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