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 Google (Nasdaq: GOOG ) 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 Google.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||32.3%||Pass|
|1-Year Revenue Growth > 12%||27.1%||Pass|
|Margins||Gross Margin > 35%||65.2%||Pass|
|Net Margin > 15%||27.0%||Pass|
|Balance Sheet||Debt to Equity < 50%||11.8%||Pass|
|Current Ratio > 1.3||5.96||Pass|
|Opportunities||Return on Equity > 15%||19.5%||Pass|
|Valuation||Normalized P/E < 20||24.95||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of 7, Google shows you exactly the search result you'd like to see. The search-engine giant has inspired innovation since before its IPO, and recent events show that it's not content with treading water based on its past success.
Google has demonstrated that it's the king of its core search business, defeating Yahoo! (Nasdaq: YHOO ) and keeping Microsoft's (Nasdaq: MSFT ) Bing under submission. But the company has kept trying to find other ways to broaden its reach.
One big move Google made was to go up against Apple (Nasdaq: AAPL ) in developing the Android smartphone operating system. The open-source OS now controls more than 40% of the U.S. smartphone market, more than half again Apple's share and taking a big amount of Research In Motion's (Nasdaq: RIMM ) declining business.
But yesterday, Google made a big move, choosing to buy out Motorola Mobility (NYSE: MMI ) in a $12.5 billion deal. Fellow Fool Anders Bylund sees the move as a calculated gamble, as Google has to walk a fine line. It can't afford to alienate other partners, such as Samsung and HTC, by suggesting that it could put them at a competitive disadvantage to Motorola devices. Yet at the same time, Google must stand up to Apple and other smartphone competitors in a meaningful way.
What Google has demonstrated in the past is a willingness to take risk and a drive to make its moves work. With so much at stake, whether Google will achieve perfect status could hinge on whether the Motorola deal allows it to declare final victory over its rivals.
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.