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 Sirius XM Radio (Nasdaq: SIRI ) 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 Sirius XM Radio.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||41.5%||Pass|
|1-Year Revenue Growth > 12%||7.6%||Fail|
|Margins||Gross Margin > 35%||62.5%||Pass|
|Net Margin > 15%||9.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||492.9%||Fail|
|Current Ratio > 1.3||0.48||Fail|
|Opportunities||Return on Equity > 15%||62%||Pass|
|Valuation||Normalized P/E < 20||43.67||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 three points, Sirius XM Radio has some room for improvement. But it's hard to argue with a stock price that jumped almost 12% in a flat year for the overall market, although the stock gave back much larger gains from earlier in the year.
After the merger of the two big competitors in satellite radio, Sirius XM stood alone in the space. But that doesn't mean that the company doesn't have competition. Although conventional radio hasn't posed much of a threat to Sirius XM's wide lineup of choices, the recent IPO of Pandora (NYSE: P ) highlighted the battle in bringing streaming radio to vehicles via smartphones and wireless Internet. Both Ford (NYSE: F ) and Toyota (NYSE: TM ) now have cars that offer Bluetooth streaming, which means that these companies are less dependent on Sirius to provide radio options that car buyers want, and Sirius in turn can't count on new vehicle sales to automatically drive growth -- or pose a wide moat to Pandora and other competitors.
But Sirius has done a good job with its fundamentals. The company became profitable and cash-flow positive in 2011 and saw increased subscriber counts.
The big question going forward is whether its planned rate increase will go well. With streaming video, Netflix (Nasdaq: NFLX ) made a misstep in hiking its rates by a whopping 60% on some of its users. That hurt the company, but it also provided an object lesson to Sirius. The satellite radio company's 12% increase looks a lot easier to swallow.
Going forward, Sirius needs to demonstrate that its offerings are stronger than anything the Internet can provide. That could be a tough test, and with high debt levels and rich valuations, Sirius has little margin of error if it falls short. If it succeeds, though, then it could get back on the road toward perfection in a hurry.
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."