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 Sprint Nextel (NYSE: S ) 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 Sprint Nextel.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3.8%)||Fail|
|1-Year Revenue Growth > 12%||3.5%||Fail|
|Margins||Gross Margin > 35%||45.4%||Pass|
|Net Margin > 15%||(7.6%)||Fail|
|Balance Sheet||Debt to Equity < 50%||142.1%||Fail|
|Current Ratio > 1.3||1.13||Fail|
|Opportunities||Return on Equity > 15%||(17.6%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Sprint Nextel last year, it has failed to get any better reception, maintaining its single-point score. The mobile giant has made some strides, but it's also taking a big gamble to try to keep itself viable.
As a major player in the U.S. mobile industry, Sprint should be reaping the rewards from the huge growth in smartphone demand in the past few years. But in part because of its wishy-washy strategic moves, the company seems to remain in a perpetual state of uncertainty.
For instance, although Sprint beat rivals AT&T (NYSE: T ) and Verizon (NYSE: VZ ) to offer customers the first 4G wireless technology, it did so by adopting WiMAX technology, which has turned out to be slower than the LTE technology that AT&T and Verizon use. As a result, Sprint now finds itself trapped -- as majority owner of WiMAX provider Clearwire (Nasdaq: CLWR ) , Sprint has a clear incentive to continue using WiMAX. But it also signed an agreement to get an LTE network of its own from LightSquared, which has raised concerns of its own. And more recently, the company announced an "LTE-Advanced" technology to come out in 2013.
What the company hopes will save it, though, is its long-term deal to gain access to Apple's (Nasdaq: AAPL ) iPhone. Sprint committed to buying more than 30 million of the devices over the next four years, a deal that adds up to about $20 billion. The company even admitted that it would lose money on the deal at least through 2014, suggesting just how shaky Sprint's overall situation is right now.
In order to get itself out of the basement, Sprint truly needs to figure out how to go forward. With the AT&T and T-Mobile merger seemingly on hold for now, Sprint's best option may be to look for a partner to try to gain some much-needed synergies. Otherwise, Sprint may not go anywhere for a long time.
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."