Has Stamps.com 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 Stamps.com (Nasdaq: STMP  ) 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 Stamps.com.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

5.4%

Fail

 

1-Year Revenue Growth > 12%

16.2%

Pass

Margins

Gross Margin > 35%

75.7%

Pass

 

Net Margin > 15%

37.8%

Pass

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

4.65

Pass

Opportunities

Return on Equity > 15%

48.3%

Pass

Valuation

Normalized P/E < 20

31.57

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

6 out of 10

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

Since we looked at Stamps.com last year, the company has picked up a point, with a big jump in net margins. The stock, though, hasn't made investors very happy, with a 20% drop over the past year.

Stamps.com is one of the increasingly rare companies that survived the Internet boom and bust more than 10 years ago. Initially soaring to more than $150 per share, Stamps.com came plunging downward to almost the $4 mark in late 2001 before starting a long recovery. Now, it's one of three approved online postage sellers, alongside competitors Pitney Bowes (NYSE: PBI  ) and Newell Rubbermaid's (NYSE: NWL  ) Endicia.com. Despite having a strong position in the online space, Stamps.com still represents only about 1.5% of total U.S. Postal Service postage revenue, showing that it has plenty of room to grow as it continues to challenge Pitney Bowes' historical dominance of the postage industry.

Earlier this year, Stamps.com dropped lawsuits between it and Newell's PSI Systems subsidiary, which operates the Endicia website. Both companies had alleged that the other had violated its patents, although a ruling last year on a previous Stamps.com lawsuit threw cold water on the patent-related claims at issue there.

With its emphasis on USPS-based shipping, Stamps.com has a challenge from the Post Office's financial woes. If United Parcel Service  (NYSE: UPS  ) and FedEx (NYSE: FDX  ) continue to take away market share at the expense of the USPS, then Stamps.com could have to shift more toward an all-carrier approach.

In its most recent quarter, though, Stamps.com impressed investors, beating earnings estimates and raising guidance for the full year. The company hit new records for customer count and revenue per paid customer.

For Stamps.com to keep improving, it needs to have new initiatives like the USPS-Amazon.com partnership bear fruit. If growth rates continue to climb, then Stamps.com could get much closer to perfection in the next year or two.

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 the best investments from the rest.

Speaking of shipping, the retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our special report. Uncovering these top picks is free today; just click here to read more.

Click here to add Stamps.com to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and FedEx. Motley Fool newsletter services recommend Amazon.com, FedEx, and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


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  • Report this Comment On November 01, 2012, at 5:47 PM, tim8rolls wrote:

    BEWARE, be informed... Stamps.com is expecting $7 million in insurance revenue for fiscal year which provides them substantial NOL ASSET relief. ALL OF THIS is unbecoming a legitimate business. USPS is being cheated.

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