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 Alcatel-Lucent (NYSE: ALU ) 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 Alcatel-Lucent.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.4%||Fail|
|1-Year Revenue Growth > 12%||8.0%||Fail|
|Margins||Gross Margin > 35%||36.1%||Pass|
|Net Margin > 15%||3.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||129.6%||Fail|
|Current Ratio > 1.3||1.32||Pass|
|Opportunities||Return on Equity > 15%||19.2%||Pass|
|Valuation||Normalized P/E < 20||11.63||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Alcatel-Lucent last year, the communications equipment maker has rebounded sharply from its score of 0 to climb all the way to four points. Improving gross margins, returns on equity, and earnings have all contributed to the score boost, but the stock has floundered, and the company still has a long way to go if it wants to reach perfection.
For Alcatel, 2011 included both feast and famine for shareholders. Early in the year, the company took advantage of weakness from industry giant Cisco Systems (Nasdaq: CSCO ) , grabbing orders and boosting revenue. The company even returned to profitability, as big telco customers AT&T (NYSE: T ) and Verizon (NYSE: VZ ) turned to Alcatel to try to keep up with the huge demand for wireless network capacity.
But that turned to bad news later in the year, as Alcatel posted a decline in third-quarter sales and projected continued weakness for the rest of 2011. The stock plunged as analysts abandoned ship, after both Verizon and AT&T announced big capital-spending cutbacks that are seen lasting well into 2012 and possibly beyond. That's likely behind Alcatel's decision to cut more than 300 jobs in France last week.
Looking forward, Alcatel-Lucent's shares reflect uncertainty that its recent moves will bring on a lasting rebound for the battered company. Despite its cheap shares and positive results recently, investors would likely do better looking elsewhere for 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.
If you're afraid that Alcatel-Lucent's recovery may be short-lived, you may want to find some safer alternatives. I'd suggest taking a look at the Fool's latest special report absolutely free. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.
Click here to add Alcatel-Lucent to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.