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 and then decide whether MetroPCS (NYSE: PCS ) 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 MetroPCS.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||29.2%||Pass|
|1-Year Revenue Growth > 12%||17.9%||Pass|
|Margins||Gross Margin > 35%||41.5%||Pass|
|Net Margin > 15%||5.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||172.6%||Fail|
|Current Ratio > 1.3||3.54||Pass|
|Opportunities||Return on Equity > 15%||9.0%||Fail|
|Valuation||Normalized P/E < 20||11.36||Pass|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With 5 points, MetroPCS doesn't look all that bad. But the score doesn't reflect the company's huge struggles at the low end of its industry.
At first glance, MetroPCS seems to be in the thick of one of the hottest sectors of the market: wireless communications. But unlike AT&T (NYSE: T ) and Verizon (NYSE: VZ ) , which make lots of money from customers who choose expensive phone and data plans, MetroPCS focuses on prepaid customers who don't want the burden of a long-term contract -- or who can't pass a credit check.
That puts MetroPCS squarely in the crosshairs of competitors like America Movil (NYSE: AMX ) and its Net10 and Tracfone franchises, as well as upstart Leap Wireless (Nasdaq: LEAP ) and struggling Sprint Nextel (NYSE: S ) . In the past year, MetroPCS did well to build up subscriber counts and earn strong profits, digging itself out of the hole that the financial crisis left it in.
More recently, though, that trend has come to a halt. In its most recent quarter, the company disappointed with weak earnings, sending shares plummeting more than 40% in the first four days of the trading week.
Going forward, the company is trying to upgrade itself, offering Android-based smartphones to customers. But with huge amounts of debt, low net margins, and a complete lack of dividend income, MetroPCS isn't going to be a perfect stock anytime soon.
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.