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 and then decide whether Apple (Nasdaq: AAPL ) 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 Apple.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||44%||Pass|
|1-Year Revenue Growth > 12%||67.6%||Pass|
|Margins||Gross Margin > 35%||42.4%||Pass|
|Net Margin > 15%||25.8%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||1.58||Pass|
|Opportunities||Return on Equity > 15%||45.6%||Pass|
|Valuation||Normalized P/E < 20||21.83||Fail|
|Dividends||Current Yield > 2%||1.7%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||7 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Apple just initiated a dividend policy in 2012. Total score = number of passes.
Since we looked at Apple last year, the iDevice giant has kept its 7-point score. But the appearance of a dividend puts the company in a much better position to achieve perfection going forward.
Apple is the main reason the stock market has done so well lately. On the product front, the company's successes just keep coming. The third version of its iPad sold more than 3 million units in just the first weekend it was available. Meanwhile, rumors that the iPhone 5 could be available as early as June have analysts again thinking that Apple's revenue could keep growing at its explosive pace for some time, especially as it supplants Research In Motion (Nasdaq: RIMM ) in penetrating the corporate market, which RIM used to have a lock on.
One key to that growth will be emerging markets. Fool analyst Eric Bleeker believes that with Brazil having had limited iPhone 4S availability during the holiday season and China having none, this quarter could be a blowout for the smartphone giant. As Apple iOS and Google (Nasdaq: GOOG ) Android activation volume in China overtakes U.S. figures, Apple's focus will necessarily shift more toward overseas markets.
The unknown for Apple is how its Apple TV initiative will perform. With Intel (Nasdaq: INTC ) and Microsoft (Nasdaq: MSFT ) also trying to line up content and distribution channels for similar ventures, Apple has the advantage of the iTunes ecosystem to sell to already-captured customers.
With a dividend now in place, all it would take for Apple to achieve perfection is a slightly lower valuation and a small increase in its payout. Given its explosive growth, however, arguments that Apple is overpriced don't carry as much weight as they may have with past market-cap leaders. If Apple can continue its product dominance, it could be the first stock to reach a perfect 10 on our scale in future years.
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.
Apple is one way to bet on the tech revolution, but we think there might be an even better play. The Motley Fool has released a free report on mobile named "The Next Trillion-Dollar Revolution" that details a hidden component play inside mobile phones that's also absolutely dominating the exploding tech market in China. Inside the report, we not only describe why the mobile revolution will dwarf any other technology revolution seen before it, but we also name the company at the forefront of the trend. Hundreds of thousands have requested access to previous reports, but you can be among the first to access this report by clicking here -- it's free.
Add Apple to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.