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 Acme Packet (Nasdaq: APKT ) 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 Acme Packet.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||40.4%||Pass|
|1-Year Revenue Growth > 12%||57.3%||Pass|
|Margins||Gross Margin > 35%||82.6%||Pass|
|Net Margin > 15%||19.0%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||6.68||Pass|
|Opportunities||Return on Equity > 15%||16.6%||Pass|
|Valuation||Normalized P/E < 20||118.09||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 7, Acme Packet comes as close to perfection as a high-priced growth stock with no dividend can reach. In just a few short months, the stock has soared, yet some believe it has plenty more room to run.
Yesterday's buyout of Skype underscores the importance of Internet-based telephone services. With Microsoft (Nasdaq: MSFT ) putting a value of $8.5 billion on Skype, it has declared war on Google's (Nasdaq: GOOG ) Talk network. And with smaller players like Vonage (NYSE: VG ) and 8x8 (Nasdaq: EGHT ) relying on the Internet for similar services, some are betting that Internet voice could eventually replace landlines entirely.
Unfortunately, sound quality on Internet calls often stinks. That's where Acme Packet comes in. Its session border controller technology works with Voice over Internet Protocol networks to make sure that various parts of the Internet can communicate smoothly with each other, enhancing call quality.
That's been a ticket to success for the company. Late last month, it announced a 45% jump in revenue and a 69% increase in net income, outpacing analyst estimates by a wide margin. Moreover, Acme Packet increased guidance for the coming year.
Like cloud cousin Riverbed Technology (Nasdaq: RVBD ) , which also builds devices that help facilitate Internet traffic, Acme Packet is in the right place at the right time. With a super-high valuation, investing in Acme Packet isn't for the meek. But at the pace things are moving in the Internet phone space, Acme Packet could just be beginning to move toward 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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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.