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 AsiaInfo-Linkage (Nasdaq: ASIA ) 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 AsiaInfo-Linkage.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||38.5%||Pass|
|1-Year Revenue Growth > 12%||104.5%||Pass|
|Margins||Gross Margin > 35%||44.0%||Pass|
|Net Margin > 15%||18.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.40||Pass|
|Opportunities||Return on Equity > 15%||12.7%||Fail|
|Valuation||Normalized P/E < 20||14.03||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||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 seven, AsiaInfo-Linkage looks like it's doing a good job with its financial performance. But one analyst has raised some concerns about whether the Chinese telecom software and services provider can sustain its huge growth rate.
AsiaInfo is the largest seller of telecom IT software in China. The company is in the enviable position of doing business with China Mobile (NYSE: CHL ) , China Unicom (NYSE: CHU ) , and China Telecom (NYSE: CHA ) , although China Mobile makes up more than 60% of AsiaInfo's revenue.
But the company has seen some bad news recently. Last month, AsiaInfo reported decent earnings but announced disappointing guidance for the coming quarter. Then earlier this week, analyst firm Susquehanna downgraded AsiaInfo's shares from positive to neutral and slashed its target price by more than half, to just less than what the stock had traded for before the announcement. Yet unless the rest of the Street follows suit, fairly optimistic earnings figures for this year and next make the stock look like a bargain at current prices.
The big question going forward is how well AsiaInfo can do at locking out its competitors. With big names Cisco (Nasdaq: CSCO ) and IBM (NYSE: IBM ) fighting for business in the Chinese telecom market, AsiaInfo faces an uphill climb to sustain its strong growth. If it can, though, AsiaInfo stands poised to potentially become a perfect stock.
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 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."