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 ExactTarget (NYSE: ET ) 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 ExactTarget.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||46.1%||Pass|
|1-Year Revenue Growth > 12%||54.5%||Pass|
|Margins||Gross Margin > 35%||66.2%||Pass|
|Net Margin > 15%||(17.1%)||Fail|
|Balance Sheet||Debt to Equity < 50%||13.6%||Pass|
|Current Ratio > 1.3||1.50||Pass|
|Opportunities||Return on Equity > 15%||(46.0%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With five points, ExactTarget finishes right in the middle of the road. The company has the growth chops to have impressive prospects, but it hasn't yet figured out how to turn its revenue into profits.
As advertising and marketing have become more important aspects of the Internet, tools to help manage campaigns are increasingly useful. ExactTarget supplies software solutions that allow customers to do email marketing solicitations, evaluate responses, and get the feedback they need to become more successful at it. ExactTarget went public in March to some fanfare.
But ExactTarget doesn't have the market to itself. Constant Contact (Nasdaq: CTCT ) has made a name for itself by helping customers get similar information from their email-based-marketing campaigns. Even more importantly, Jive Software (Nasdaq: JIVE ) and Millennial Media (NYSE: MM ) have focused more on the rapidly evolving mobile world, with Millennial integrating ads into smartphone apps while Jive provides social platforms for businesses and has been working on "gameifying" the buying or recommending of products. Although there's plenty of room for ExactTarget to penetrate the market, it will need to work hard to differentiate itself from existing players.
For ExactTarget to thrive, it needs to ramp up quickly so it can start focusing on become profitable. Although startups have time to turn sales into income, ExactTarget has been around since 2000 and therefore should have a viable plan in place to make money. Once it does, if it can top its competition, ExactTarget could start moving closer to 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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