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 BCE (NYSE: BCE ) 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 BCE.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.6%||Fail|
|1-Year Revenue Growth > 12%||1.9%||Fail|
|Margins||Gross Margin > 35%||72.6%||Pass|
|Net Margin > 15%||12.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||65.5%||Fail|
|Current Ratio > 1.3||0.60||Fail|
|Opportunities||Return on Equity > 15%||14.2%||Fail|
|Valuation||Normalized P/E < 20||13.92||Pass|
|Dividends||Current Yield > 2%||5.6%||Pass|
|5-Year Dividend Growth > 10%||4.4%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just three points, BCE doesn't look like a perfect stock. As Canada's legacy telecom provider, the company has a combination that U.S. investors would be quite familiar with: healthy yields and low valuations with questionable growth prospects going forward.
BCE, which stands for Bell Canada Enterprises, has the typical combination of phone, Internet, and satellite TV products for residential and business customers that you'll find at most stateside telecom companies. The company has seen some interesting times in recent years, as a proposed $41 billion leveraged buyout of BCE by several institutional investors -- including Ontario's teachers' pension plan -- lingered for a year and a half in 2007 and 2008. Auditors finally shot the deal down during the depths of the financial crisis when they concluded that the new entity wouldn't be solvent after the takeover.
Since then, BCE has seen its stock more than double. Yet it struggles with many of the same challenges you see elsewhere in telecom. Like AT&T (NYSE: T ) and Verizon (NYSE: VZ ) , BCE has somewhat high debt levels, weak growth, and dividends that, while high, don't have huge potential for future growth. Closer to home, BCE competes well against Telus (NYSE: TU ) , but Rogers Communications (NYSE: RCI ) has much better returns on equity at a fairly similar valuation.
BCE has the payout to attract dividend investors seeking some international exposure. But unless the telecom giant finds a way to reignite strong growth, BCE has a long way to go before it could 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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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.