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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if VeriFone Systems (NYSE: PAY ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 VeriFone Systems.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||15.9%||Pass|
|1-Year Revenue Growth > 12%||24.3%||Pass|
|Margins||Gross Margin > 35%||37.7%||Pass|
|Net Margin > 15%||11.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||180%||Fail|
|Current Ratio > 1.3||2.97||Pass|
|Opportunities||Return on Equity > 15%||67.3%||Pass|
|Valuation||Normalized P/E < 20||91.06||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 5, VeriFone finishes in the middle of the pack. The electronic payments facilitator has seen some strong growth lately, but its shares have been bid into the stratosphere lately, and the company needs to show it can follow through on investors' expectations.
If you've ever used a credit card, you've probably used a VeriFone product. The company makes card readers and other devices you'll find at retail cash registers.
What has investors excited, though, is the coming trend in payment: near-field communications (NFC). Although much of the attention in NFC has been focused on smartphone-related plays like chip maker NXP Semiconductors (Nasdaq: NXPI ) along with mobile service providers AT&T (NYSE: T ) and Verizon (NYSE: VZ ) , VeriFone should have a role to play in whatever NFC solution becomes dominant. Moreover, the company's plan to acquire Hypercom (NYSE: HYC ) only bolsters that argument, solidifying VeriFone's position in the industry.
The big question, though, is whether the potential justifies VeriFone's huge valuation. The company recently announced strong earnings, but the future needs to stay bright if VeriFone is going to keep trading at 24 times earnings estimates for 2012. VeriFone isn't the perfect stock yet, but if trends go its way, it could become one in the years to come.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.