Is NetApp the Perfect Stock?

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 NetApp (Nasdaq: NTAP  ) 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 NetApp.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 19.9% Pass
  1-year revenue growth > 12% 30.3% Pass
Margins Gross margin > 35% 65% Pass
  Net margin > 15% 13.1% Fail
Balance sheet Debt to equity < 50% 29.9% Pass
  Current ratio > 1.3 1.90 Pass
Opportunities Return on equity > 15% 21.1% Pass
Valuation Normalized P/E < 20 43.04 Fail
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
       
  Total Score   6 out of 10

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

NetApp scores six points, putting it well on its way toward perfection. Although the company's shares have suffered in recent months, the future is starting to look brighter.

NetApp is a specialist in data storage. In fighting with its archrival EMC (NYSE: EMC  ) , NetApp has turned to a number of strategic alliances, ranging from a cloud-computing partnership with Microsoft (Nasdaq: MSFT  ) to membership in a consortium of virtual computing players that include Cisco (Nasdaq: CSCO  ) and EMC subsidiary VMware (NYSE: VMW  ) .

Earlier this year, though, shares started falling as investors read a negative future into the company's fourth-quarter results. Yet in its more recent earnings release last week, the company surprised not only analysts but also itself by posting strong earnings. Although it faces competition from new EMC products, NetApp's CEO says that the company has held its own, and it's apparent that the company is pulling away from generalists like IBM (NYSE: IBM  ) and Hewlett-Packard (NYSE: HPQ  ) .

Whether businesses turn to the cloud or continue keeping their own data, reliable storage methods are always going to be essential. As long as NetApp doesn't let its competitors pass it by, it should benefit from that continuing trend. And although the shares are pricey now, in time its strong growth may justify those high multiples as the stock gets closer to perfection.

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 NetApp to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Microsoft, IBM, and EMC, and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Microsoft, Cisco Systems, and VMware, as well as creating a diagonal call position in Microsoft. 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.


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