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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 Hewlett-Packard (NYSE: HPQ ) 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 areas, which 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 Hewlett-Packard.
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just two points, Hewlett-Packard isn't getting a perfect score anytime soon. Unfortunately, the company is best known for its high-priced acquisitions over the past year and its CEO controversy than for anything the company itself has done lately.
Lately, HP has been desperately trying to play catch-up against primary competitors Oracle (Nasdaq: ORCL ) and IBM (NYSE: IBM ) . Its $2.1 billion purchase of 3PAR late last year was aimed at matching high-end storage offerings seen from not only IBM but EMC (NYSE: EMC ) and NetApp (Nasdaq: NTAP ) , as well. Unfortunately for HP, its bidding war over 3Par with Dell (Nasdaq: DELL ) put the price tag into the stratosphere.
More troubling is the $1.2 billion the company spent on Palm. Only now is HP starting to come out with smartphones, tablets, and netbooks based on Palm's webOS operating system. That may well be too late, especially in the highly competitive tablet market where Google's Honeycomb version of the Android operating system is shaping up to be the major alternative to the iPad's iOS.
Having lost former leader Mark Hurd to Oracle, HP is also having to get an untested new CEO up to speed. Combined with weak growth, low margins, and an insignificant dividend that's been flat for the past 13 years, HP has a lot of work to do before it can even contend in the race to become the perfect stock.
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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