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 Clearwire (Nasdaq: CLWR ) 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 Clearwire.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||NM||NM|
|1-Year Revenue Growth > 12%||147.5%||Pass|
|Margins||Gross Margin > 35%||6.0%||Fail|
|Net Margin > 15%||(55.9%)||Fail|
|Balance Sheet||Debt to Equity < 50%||113.3%||Fail|
|Current Ratio > 1.3||1.80||Pass|
|Opportunities||Return on Equity > 15%||(58.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 8|
Source: S&P Capital IQ. NM = not meaningful; Clearwire had no revenue until 2008 and had negative earnings over the past 12 months. Total score = number of passes.
With a score of only two, Clearwire is hanging on by a thread. The company has struggled to raise cash in a capital-intensive industry, and it may have chosen the wrong horse to back as the mobile industry continues to evolve and consolidate.
Clearwire is the company that built out a WiMAX 4G network for Sprint Nextel (NYSE: S ) . The strategy helped Sprint beat AT&T (NYSE: T ) and Verizon (NYSE: VZ ) to the 4G finish line. But because WiMAX technology is slower than the LTE technology that AT&T and Verizon are using to build up their 4G networks, Sprint is now having to juggle its relationship with Clearwire while trying to build a competing LTE 4G network.
Complicating matters is the fact that three years ago, when Clearwire needed capital, Sprint took a majority stake in Clearwire, with several other companies, including Intel (Nasdaq: INTC ) and Comcast (Nasdaq: CMCSA ) , taking a minority stake. But the relationship between Sprint and Clearwire has been very rocky, especially recently. Last week, Clearwire said that it wouldn't be able to make a scheduled interest payment on its debt unless Sprint renewed its contract with Clearwire beyond 2012. Sprint blinked, offering total funding of $1.6 billion to secure WiMAX service through 2013.
Just this week, Clearwire said that it would make a secondary offering of stock to raise cash. Yesterday, it gave details, saying that it would up its planned offering from $300 million to $350 million, with shares pricing at $2, well beneath where the shares traded before the announcement.
Unfortunately, the future looks extremely uncertain for Clearwire. What is clear, though, is that current shareholders run the risk of massive dilution for the foreseeable future. Unless Clearwire can get its act together, it's never going to 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 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."