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 Vodafone (Nasdaq: VOD ) 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 Vodafone.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.3%||Fail|
|1-Year Revenue Growth > 12%||1.2%||Fail|
|Margins||Gross Margin > 35%||32.0%||Fail|
|Net Margin > 15%||14.99%||Fail|
|Balance Sheet||Debt to Equity < 50%||44.3%||Pass|
|Current Ratio > 1.3||0.83||Fail|
|Opportunities||Return on Equity > 15%||8.4%||Fail|
|Valuation||Normalized P/E < 20||14.21||Pass|
|Dividends||Current Yield > 2%||5.5%||Pass|
|5-Year Dividend Growth > 10%||7.1%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Vodafone last year, the company has dropped a point. Falling margins are the culprit, but the shares have done a good job holding up even in a very tough environment in Europe.
U.K.-based Vodafone gets painted with the same brush as other mobile telecoms serving the struggling European market right now. Given the uncertainties on the Continent, competitors Telefonica (NYSE: TEF ) and France Telecom (NYSE: FTE ) have faced enormous challenges for quite a while. Yet in part because of its wide penetration across the globe, especially in faster-growing emerging markets, Vodafone has avoided the big share-price plunges that France Telecom and Telefonica have suffered.
Many don't realize it, but Vodafone is a big player in the U.S. as well. It owns a 45% stake in Verizon Wireless, with Verizon (NYSE: VZ ) owning the other 55%. That investment has produced huge dividends for Vodafone, giving it much-needed cash to help its expansion elsewhere.
Vodafone is also jumping whole-hog into the mobile payment space. Earlier this year, it got together with Visa (NYSE: V ) to offer its Vodafone Mobile Wallet. Although the initial rollout has been slow, the company expects to use its extensive global reach to eventually offer the service in 30 countries.
For Vodafone to improve, it needs to overcome slowing growth in emerging-market economies and the European crisis to continue producing better sales and higher-margin business. Given how important mobile telecom has become in the world, Vodafone has every opportunity to become a perfect stock in the long run.
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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