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 Sonus Networks (Nasdaq: SONS ) 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 Sonus Networks.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.8%||Fail|
|1-Year Revenue Growth > 12%||2.1%||Fail|
|Margins||Gross Margin > 35%||55.7%||Pass|
|Net Margin > 15%||(9%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||4.71||Pass|
|Opportunities||Return on Equity > 15%||(5.6%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.
Sonus Networks doesn't end up sounding too good with a score of only three points. The company has plenty of promise in its voice-over-Internet protocol business, but it hasn't been able to execute strongly yet.
Sonus makes voice and video networking equipment that companies need to enable people to communicate over the Internet. By using Sonus routers, companies like Vonage (NYSE: VG ) and Level 3 Communications (Nasdaq: LVLT ) convert voice to data that can then get transmitted to the intended recipient. Telecom giant AT&T (NYSE: T ) is Sonus' biggest customer.
Sonus faces some pretty heavy competition, however. Giants like Cisco (Nasdaq: CSCO ) and Alcatel-Lucent (NYSE: ALU ) have consistently given Sonus a run for its money. In its most recent quarter, Sonus disappointed investors with an unexpected adjusted loss, as gross margins fell due to a collaboration with Calix (NYSE: CALX ) on a major networking equipment contract.
In the currently fast-moving environment for communications, what seems like the most promising technology one day may end up being obsolete the next. Until Sonus demonstrates that it can achieve consistent profitability while keeping up with the big guns in its industry, it will keep falling short of perfection for shareholders.
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."