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 DigitalGlobe (NYSE: DGI ) 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 DigitalGlobe.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||27.9%||Pass|
|1-Year Revenue Growth > 12%||6.6%||Fail|
|Margins||Gross Margin > 35%||85.2%||Pass|
|Net Margin > 15%||0.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||68.1%||Fail|
|Current Ratio > 1.3||2.85||Pass|
|Opportunities||Return on Equity > 15%||0.2%||Fail|
|Valuation||Normalized P/E < 20||240.14||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only 3 points, DigitalGlobe isn't getting investors where they want to go. The satellite-imagery company gained note when surveillance pictures helped the U.S. military find Osama bin Laden, but slowing growth has many shareholders concerned about the company's future.
DigitalGlobe provides satellite images for both military and commercial purposes. Known for working with Google (Nasdaq: GOOG ) on its Google Maps and Google Earth products, DigitalGlobe moved on to make agreements with companies including Nokia (NYSE: NOK ) and Oracle (Nasdaq: ORCL ) . Late last year, the company announced a deal with China Mobile (NYSE: CHL ) to supply imagery for smartphone navigation to the Chinese telecom. But DigitalGlobe relies on its defense and intelligence segment for nearly 80% of its revenue.
The latest quarter has been a tough one for the industry. Both DigitalGlobe and archrival GeoEye (Nasdaq: GEOY ) missed earnings estimates, although DigitalGlobe at least managed to give investors a more favorable future outlook than GeoEye did.
Going forward, the main question for both DigitalGlobe and GeoEye is how they can continue to improve their products to keep government and commercial customers interested. Any company that relies on defense-related spending is cowering in fear of potential budget cuts, but DigitalGlobe's intelligence specialty is an essential component for national security. If it can advance to higher-resolution imagery, then DigitalGlobe could get a lot closer to perfection in the years ahead.
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.