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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 Motricity (Nasdaq: MOTR ) 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 Motricity.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||57.1%*||Pass|
|1-Year Revenue Growth > 12%||17.3%||Pass|
|Margins||Gross Margin > 35%||64.2%||Pass|
|Net Margin > 15%||(5.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||3.57||Pass|
|Opportunities||Return on Equity > 15%||(4.3%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Motricity had negative earnings during the period. * 4-year growth rate. Total score = number of passes.
With a score of 5, Motricity looks at first glance like it's just chugging along at a normal speed. But the mobile data provider seems poised to soar based on its presence in a fast-growing industry.
Motricity hit the public markets running with a big IPO last June. Shares soared as investors believed that the company, which attempts to tailor personalized content to mobile device users, would help carriers AT&T (NYSE: T ) , Verizon (NYSE: VZ ) , and Sprint Nextel (NYSE: S ) deliver the content their customers most wanted to see.
Recently, though, the stock has fallen sharply. As the IPO's six-month lockup period expired, momentum-driven shareholders feared that insiders would dump their shares for a quick profit. Yet just as quickly, the shares sometimes turn around and rise on news of new customers or promising sources of revenue.
As a young company, Motricity doesn't have the history to determine whether it's going to be a perfect stock. Until it has a longer track record behind it, you can expect plenty of volatility as speculators move from one side of the fence to the other.
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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