Has Leap Wireless 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 Leap Wireless (Nasdaq: LEAP  ) 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 Leap Wireless.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 17.6% Pass
  1-Year Revenue Growth > 12% 8.9% Fail
Margins Gross Margin > 35% 41.4% Pass
  Net Margin > 15% (9.3%) Fail
Balance Sheet Debt to Equity < 50% 568.3% Fail
  Current Ratio > 1.3 1.37 Pass
Opportunities Return on Equity > 15% (43.3%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Leap Wireless last year, the company hasn't been able to improve on its three-point score. Shareholders aren't happy about the low-cost mobile provider, either, with the stock having dropped 25% in the past year.

Leap Wireless has tried to find its niche in the mobile revolution by focusing on low-cost service. Unlike bigger rivals Sprint (NYSE: S  ) and AT&T (NYSE: T  ) , which tend to lock subscribers into costly long-term contracts, Leap woos cost-conscious shoppers with lower prices and prepaid no-contract options. That has been a tough place to succeed, though, with it and fellow budget provider MetroPCS (NYSE: PCS  ) having struggled for a long time to thrive in the low end of the industry.

But back in June, Leap made a big announcement: it would start selling the iPhone through its Cricket service with only a partial subsidy. That makes the iPhone sell for a much higher price, but Leap's prepaid plans offer substantial monthly savings over AT&T and Verizon (NYSE: VZ  ) . Sprint's Virgin Mobile division answered with its own completely unsubsidized iPhones with even cheaper monthly plans, but Cricket announced just last week that it would start offering the iPhone 5 on Sept. 28.

Leap is doing its best to stay competitive, having recently made a deal with Verizon to swap wireless spectrum in different wavelength bands. But Leap faces a fundamental problem: it still hasn't figured out how to become profitable.

For Leap to improve, it needs to cash in on its iPhone offerings and get itself into the black. Given how many competitors it has in that space, that'll be tough to accomplish. But unless it does, Leap will likely never 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.

The mobile business is part of a trillion-dollar revolution, and it's worth investing in. Read the Fool's special report and find out about one stock that's tapping the mobile trend for profits. 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 Leap Wireless 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. 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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