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 Exlservice Holdings (Nasdaq: EXLS ) 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 Exlservice Holdings.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||23.5%||Pass|
|1-Year Revenue Growth > 12%||40.5%||Pass|
|Margins||Gross Margin > 35%||38.8%||Pass|
|Net Margin > 15%||8.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||1.6%||Pass|
|Current Ratio > 1.3||3.01||Pass|
|Opportunities||Return on Equity > 15%||12.5%||Fail|
|Valuation||Normalized P/E < 20||27.13||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Exlservice Holdings last year, the company has maintained its five-point score. But a nearly 20% gain in the stock over the past year has shareholders feeling reasonably good about the company and its prospects.
Exlservice is the business of helping businesses, allowing customers to concentrate on their core work areas by outsourcing their back-office operations. In particular, Exlservice provides valuable services to financial companies, where American Express (NYSE: AXP ) and Travelers (NYSE: TRV ) led a list of more than 100 global companies. In addition to banking and insurance, Exlservice also provides outsourcing services to many health-care companies as well.
This time last year, Exlservice had just gotten hit hard by a decision to do a secondary share offering, with company insiders using the opportunity to cash out. Since then, though, the company's revenue growth has remained impressive.
Whether that sales growth will continue, though, is somewhat in doubt. Back in May, Exlservice cut its revenue guidance for the remainder of the year, blaming a drop in the Indian rupee against the U.S. dollar as part of the problem. Yet in its most recent quarter, the company beat estimates both for earnings and sales. Although rival Genpact (NYSE: G ) has also done a good job of keeping its revenue up, competitor WNS Holdings (NYSE: WNS ) has suffered a substantial drop in sales in the past year.
For Exlservice to improve, it needs to do a better job of translating its substantial revenue growth into greater profit. Higher earnings could then bring the stock's multiple down, making it a better value for investors seeking a stock with long-term potential for 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.
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