Has Syntel 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 Syntel (Nasdaq: SYNT  ) 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 Syntel.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 18.3% Pass
  1-Year Revenue Growth > 12% 17.3% Pass
Margins Gross Margin > 35% 41.3% Pass
  Net Margin > 15% 22.4% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 5.66 Pass
Opportunities Return on Equity > 15% 29.5% Pass
Valuation Normalized P/E < 20 18.25 Pass
Dividends Current Yield > 2% 0.4% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Syntel last year, the company has kept its eight-point score. With better than a 50% gain for the stock over the past year, though, shareholders may feel they've already found a perfect investment.

As an outsourcing firm for information technology, Syntel keeps a pretty low profile. Yet unlike Indian competitors Infosys (Nasdaq: INFY  ) and Wipro (NYSE: WIT  ) , Syntel is based in Michigan, with a history of ties to businesses near its headquarters. Now, the company has operations around the world, including development centers in India as well as Arizona and Tennessee.

Syntel relies substantially on two main customers, American Express (NYSE: AXP  ) and State Street's (NYSE: STT  ) bank and trust division, which together made up about 40% of Syntel's revenue in 2011. That concentration hasn't hurt Syntel, though, as the company posted sales gains of more than 20% in 2011 and was able to accelerate net income growth as well.

As the economy has improved, things have continued looking up for Syntel. Back in April, the company boosted its earnings guidance for 2012, although sales didn't quite match up to expectations. Syntel's second-quarter results were equally impressive, and analysts have steadily pushed their projections for this year (and next) upward.

For Syntel to improve, it only needs to do one thing: increase its dividend payout. With a pathetically small 6% payout ratio, the company has plenty of room to pay more to shareholders. If it does, it could become a perfect stock.

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.

Syntel 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.

Click here to add Syntel 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. Motley Fool newsletter services have recommended writing a covered strangle position in American Express. 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.


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