Has AOL Become the Perfect Stock?

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 AOL (NYSE: AOL  ) 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 AOL.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% (20.7%) Fail
1-year revenue growth > 12% (3.8%) Fail
Margins Gross margin > 35% 27.8% Fail
Net margin > 15% 46.7% Pass
Balance sheet Debt to equity < 50% 3.4% Pass
Current ratio > 1.3 3.95 Pass
Opportunities Return on equity > 15% 36.9% Pass
Valuation Normalized P/E < 20 22.59 Fail
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 AOL last year, the company has gained a point. Better returns on equity are behind the jump, which is partially why the stock has soared by more than 150% in the past year.

AOL is arguably best known for pioneering mass access to the Internet, first through its proprietary service and later with its search portal and home page. Yet the days of dial-up Internet access have mostly come and gone, and AOL has seen declining revenue as high-speed broadband from a variety of providers, including rural telecoms Frontier Communications (Nasdaq: FTR  ) and Windstream (Nasdaq: WIN  ) , have supplanted AOL's former leadership role.

But earlier this year, AOL managed to pique investor interest with a huge deal with Microsoft (Nasdaq: MSFT  ) . In the deal, AOL sold more than 800 patents at a price exceeding $1 billion, which represented well over half of AOL's market cap at the time.

Still, some are skeptical about whether AOL is simply in a long process of liquidation. Its media acquisitions haven't resulted in the success that AOL had hoped to see, and its high share price puts its valuation well ahead of Yahoo! (Nasdaq: YHOO  ) and Google.

For AOL to thrive, it needs to find a way to make its media offerings produce more money. Just as Yahoo! is trying to make the most of its plentiful content, AOL will continue to rely on monetizing its offerings through advertising. In a tough ad environment, it may take quite awhile for that strategy to pay off and push AOL any closer to perfection.

Keep searching
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.

AOL probably isn't the perfect way to play the revolution in the tech industry, but we've got some other ideas you should strongly consider. Our latest special report on technology reveals three names poised to soar in the new industrial revolution. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Also, Frontier Communications is just one player trying to profit from broadband Internet service. Will it beat the competition? Find out in the Fool's premium report on Frontier today.

Click here to add AOL to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Microsoft and Google. Motley Fool newsletter services have recommended buying shares of Microsoft and Google, as well as creating a synthetic covered call position in Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1985116, ~/Articles/ArticleHandler.aspx, 8/20/2014 2:15:35 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement