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 Apple
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 Apple.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 36.3% | Pass |
| 1-Year Revenue Growth > 12% | 63.3% | Pass | |
| Margins | Gross Margin > 35% | 38.8% | Pass |
| Net Margin > 15% | 21.8% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 0.0% | Pass |
| Current Ratio > 1.3 | 1.85 | Pass | |
| Opportunities | Return on Equity > 15% | 36.8% | Pass |
| Valuation | Normalized P/E < 20 | 23.93 | Fail |
| Dividends | Current Yield > 2% | 0.0% | Fail |
| 5-Year Dividend Growth > 10% | 0.0% | Fail | |
| Total Score | 7 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With seven points, Apple doesn't quite reach perfection. But in the two areas where the stock falls short, valuation and dividends, many shareholders are already quite comfortable with the way Apple does business.
Apple's financial strength is apparent from its hugely popular products, ranging from Mac computers to iPhones and iPads. But as Foolish tech analyst Eric Bleeker notes, Apple's product success is just part of its winning strategy. With its ability to adapt its operating system to various types of devices, it challenges Microsoft
Moreover, its growth is only accelerating. Although Research In Motion
Some investors bemoan the fact that Apple doesn't pay a dividend. With Cisco Systems
Apple may not score a 10 on this scale, but looking at its past returns, it's hard to argue it hasn't been a perfect stock for long-term shareholders. It should be interesting to see how the company keeps trying to stay on top of its highly competitive industry.
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.
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