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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 Juniper Networks (NYSE: JNPR ) 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 is unable to produce profits from them. Strong margins ensure that a 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 Juniper Networks.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.0%||Fail|
|1-Year Revenue Growth > 12%||(2.1%)||Fail|
|Margins||Gross Margin > 35%||62.5%||Pass|
|Net Margin > 15%||5.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||13.9%||Pass|
|Current Ratio > 1.3||2.91||Pass|
|Opportunities||Return on Equity > 15%||3.6%||Fail|
|Valuation||Normalized P/E < 20||38.75||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Juniper Networks last year, the company has lost a point. Declining revenue is troubling, both for the company's score, and its stock price, which has fallen more than 10% in the past year.
Juniper has long stood in the shadow of its larger rival, Cisco Systems (Nasdaq: CSCO ) . But as Cisco has started making some missteps in recent years, Juniper has stepped up to challenge Cisco's former dominance.
More recently, though, Juniper has had to deal with a renewed push from Cisco to regain its leadership position. An expansion of its partnership with VMware (NYSE: VMW ) will extend Cisco's reach in the cloud, which is one area in which Juniper is hoping to build growth. For its part, Juniper is working with Riverbed Technology (Nasdaq: RVBD ) on a collaborative effort, but that will take time to produce results.
One area where Juniper could have both opportunity, and face threats, is in the growing risk of cyber-attacks. The company already has a big presence in the network protection niche, but dedicated specialist Check Point Software Technologies (Nasdaq: CHKP ) , and newly public Palo Alto Networks, are rising fast to challenge Juniper and Cisco. Still, the right moves could not only keep Check Point and Palo Alto at bay, but also give Juniper a leg up on Cisco.
For Juniper to improve, its earnings need to get in line with its stock price, and the company needs to get past sluggishness in sales to rediscover growth. Those are tough assignments in a tepid global economy, but Juniper needs to execute if it wants to get 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.
Networking is just part of a trillion-dollar revolution in technology going on, but we think there's a better stock than Juniper to capitalize on it. Find out which one it is in the Fool's special report on the Next Trillion-Dollar Revolution. It's yours free today.
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