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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 Google (Nasdaq: GOOG ) 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 Google.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||26.3%||Pass|
|1-Year Revenue Growth > 12%||29.5%||Pass|
|Margins||Gross Margin > 35%||63.2%||Pass|
|Net Margin > 15%||25.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||12.5%||Pass|
|Current Ratio > 1.3||3.84||Pass|
|Opportunities||Return on Equity > 15%||19.0%||Pass|
|Valuation||Normalized P/E < 20||26.31||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Google last year, the company has kept its seven-point score. But shareholders are impressed with the fact that the search giant's stock has gained more than 30% in the past year.
Google has long impressed investors with its command of the search-engine market. Yet the company hasn't stopped there. With its Android mobile operating system, the company took square aim at Apple (Nasdaq: AAPL ) and the smartphone dominance of the iPhone. With Chrome, Google got itself into the Internet browser market in a major way, upending Microsoft (Nasdaq: MSFT ) and Mozilla to become the browser with the highest market share.
But Google hasn't gotten everything right. Its Google+ foray into social networking has largely fallen flat even in the face of Facebook's (Nasdaq: FB ) bungled IPO. Moreover, the company still relies almost entirely on ad revenue for its sales, demonstrating its inability to monetize other offerings despite devoting huge amounts of resources to them.
One possible game-changer, though, is the Google Wallet electronic payments system. Although the system has been available for a year, Google is taking big steps toward boosting its presence in the marketplace, fixing privacy concerns, and improving its mobile-wallet app to broaden its availability. If Google can beat rivals like eBay's (Nasdaq: EBAY ) PayPal and a host of financial institutions to the punch, it could reap some impressive rewards.
For Google to improve, it will need to join the growing group of tech stocks that pay dividends. With its impressive earnings, though, that shouldn't be a major problem, and it could create even more interest in the stock.
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.
Google may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
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