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 Frontier Communications (NYSE: FTR ) 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 Frontier Communications.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||21.1%||Pass|
|1-Year Revenue Growth > 12%||79.7%||Pass|
|Margins||Gross Margin > 35%||75%||Pass|
|Net Margin > 15%||2.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||171.6%||Fail|
|Current Ratio > 1.3||0.83||Fail|
|Opportunities||Return on Equity > 15%||3.1%||Fail|
|Valuation||Normalized P/E <= 20||20.00||Pass|
|Dividends||Current Yield > 2%||15.4%||Pass|
|5-Year Dividend Growth > 10%||(5.6%)||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Frontier Communications last year, the rural telecom company has picked up a point. Another big jump in revenue this year was enough to kick Frontier's five-year average above the key 15% level.
Over the past year, Frontier has worked hard to integrate new customers from its buyout of assets from Verizon (NYSE: VZ ) . That deal tripled Frontier's subscriber base, but attrition has reduced the positive impact of gaining those customers. Some missteps in raising prices on services and installation in some key markets helped DIRECTV and Comcast lure some of Frontier's customers away.
One source of friction will come from Frontier's arrangement with AT&T (NYSE: T ) to resell wireless broadband services. With rival CenturyLink (NYSE: CTL ) teaming up with Verizon, the battle lines have been drawn in what could be a cutthroat fight for rural Internet customers -- where margins tend to be extremely attractive.
Going forward, the key for Frontier will be to find a way to maintain its dividend. Unlike Windstream (Nasdaq: WIN ) , which has seen a big boost in its dividend in recent years, Frontier already reduced its dividend once. If the dividend gets cut again, then it will further erode confidence in the stock going forward. And with a huge debt load and a not-so-cheap valuation even after a huge price decline, Frontier can't afford any more hits if it wants to strive for perfection.
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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