Is Syntel 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 whether Syntel (Nasdaq: SYNT  ) 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 Syntel.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

18.8%

Pass

 

1-Year Revenue Growth > 12%

25.3%

Pass

Margins

Gross Margin > 35%

37.2%

Pass

 

Net Margin > 15%

19.2%

Pass

Balance Sheet

Debt to Equity < 50%

0.0%

Pass

 

Current Ratio > 1.3

5.08

Pass

Opportunities

Return on Equity > 15%

25.1%

Pass

Valuation

Normalized P/E < 20

19.28

Pass

Dividends

Current Yield > 2%

0.6%

Fail

 

5-Year Dividend Growth > 10%

0.0%

Fail

       
 

Total Score

 

8 out of 10

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

With a score of eight, Syntel is racking up the points toward perfection. The outsourcing specialist has been riding high on a huge trend, and its numbers show how successful it's been on that front. But shares haven't done nearly as well, especially in recent months.

Syntel is a U.S.-based company that provides information technology outsourcing services for a wide variety of companies. That's been a lucrative business over the years, but more recently, the economic slowdown has called the industry's expansion into question. This past spring, giant Computer Sciences (NYSE: CSC  ) reported weak sales and earnings, and investors inferred that rivals from fellow industry leader Cognizant Technology (Nasdaq: CTSH  ) all the way down to small firms like Syntel would take a hit as a result.

Just last week, Syntel got bad news from research firm Susquehanna in the form of a sell recommendation on the stock. Susquehanna doesn't like that Indian rivals Wipro (NYSE: WIT  ) and Infosys (Nasdaq: INFY  ) have seen faster revenue growth over the past five years than Syntel.

While trailing sales growth was nearly 19%, the company trades at a forward P/E around 12. Essentially, Syntel investors have decided that the company's past doesn't reflect the reality of its financial future. Whether or not that's true remains to be seen, but if Syntel can get past the bumps in the economic road, it could easily become a perfect stock sooner than later.

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 Syntel 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 Computer Sciences. 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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