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 8x8 (Nasdaq: EGHT ) 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 8x8.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||13.5%||Fail|
|1-Year Revenue Growth > 12%||11.1%||Fail|
|Margins||Gross Margin > 35%||67.6%||Pass|
|Net Margin > 15%||10.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.09||Pass|
|Opportunities||Return on Equity > 15%||44.8%||Pass|
|Valuation||Normalized P/E < 20||68.68||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just four points, 8x8 seems to fall short by half. But the emerging telecom company has some innovative technology that could give it some strong growth prospects for the foreseeable future.
8x8 harnesses the Internet to support its telecommunications network, providing voice-over-Internet services to its customers. But unlike Vonage (NYSE: VG ) and the ubiquitous advertiser MagicJack, 8x8 targets business customers, striking at the heart of telecom giants CenturyLink (NYSE: CTL ) , Verizon (NYSE: VZ ) , and AT&T (NYSE: T ) .
8x8 has also started branching out beyond its core business. By adding video, the company is challenging tech bigwigs like Cisco (Nasdaq: CSCO ) . Yet given 8x8's low price points, it's clearly grabbing toward marginal customers that probably wouldn't sign up for expensive products from competitors anyway.
That model has wowed investors enough to cause shares to jump about tenfold from its lows in late 2008. But just yesterday, the company reported earnings that didn't impress shareholders. Revenue rose 10% and earnings per share nearly doubled, but from the stock's fall, it's clear that investors wanted to see even more. With the stock having nearly doubled since the beginning of the year, valuation concerns are clearly weighing on shareholders' minds.
With impressive returns on equity and fairly fast growth, 8x8 has a lot going for it. The big question is whether the company can ramp up quickly enough to maintain its strong start. If it can, then 8x8 may well move closer to perfection in the years to come.
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."