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 VeriFone Systems (NYSE: PAY ) 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 VeriFone Systems.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||16.8%||Pass|
|1-Year Revenue Growth > 12%||35.6%||Pass|
|Margins||Gross Margin > 35%||37.7%||Pass|
|Net Margin > 15%||17.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||130.5%||Fail|
|Current Ratio > 1.3||1.55||Pass|
|Opportunities||Return on Equity > 15%||32.6%||Pass|
|Valuation||Normalized P/E < 20||86.26||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at VeriFone Systems last year, the company has earned an extra point. The stock still carries a super-high valuation, but better net margins and even faster growth have kept the company moving forward.
Electronic payments are a hot segment right now, and VeriFone is right in the middle of it. The company makes card readers and other retail devices to facilitate payments, and it therefore has an incumbent's advantage when it comes to innovation in the space. Yet threats are coming from all quarters, including credit card companies, banks, and eBay (Nasdaq: EBAY ) , whose PayPal division has become a leader in the payments space.
Right now, that innovation is coming at a breakneck pace, and VeriFone is doing its best to stay in the middle of it. The company has a partnership with Visa (NYSE: V ) to provide in-taxi payment systems in 7,000 London taxi cabs for the 2012 Olympics. In addition, VeriFone has a deal with Google (Nasdaq: GOOG ) to facilitate near-field communication for the Google Wallet system.
In January, VeriFone shares soared on news that MasterCard (NYSE: MA ) was trying to adopt its new EMV technology as a standard in credit cards. VeriFone stands to benefit when merchants have to buy new payment terminals for changing technology, and the fact that MasterCard is paying incentives makes it more likely that merchants will participate.
For VeriFone to keep moving upward, it needs for earnings to catch up with its share price. If it can retain its role as facilitator between financial companies and merchants, then it should continue to have a place in the mix for the foreseeable future.
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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