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 K12 (NYSE: LRN ) 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 K12.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||34.8%||Pass|
|1-year revenue growth > 12%||31%||Pass|
|Margins||Gross margin > 35%||41%||Pass|
|Net margin > 15%||3%||Fail|
|Balance sheet||Debt to equity < 50%||7.3%||Pass|
|Current ratio > 1.3||2.84||Pass|
|Opportunities||Return on equity > 15%||4.7%||Fail|
|Valuation||Normalized P/E < 20||63.13||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 & Poor's. Total score = number of passes.
K12 graduates from our test with five points. The online educator may seem to be tarnished with the same brush as companies teaching older students, but in fact, it's an entirely different business.
As its name suggests, K12 has developed online curricula for students from kindergarten through high school. The company's "virtual public schools" get funding from state and local governments. But far from simply getting on the computer and never having any hands-on experience, students have K12 facilitating field trips, hiring teachers, and enhancing social networking through clubs.
Right now, though, you might think that any stock that mixes "profit" with "education" leaves a bad taste in investors' mouths. With controversies about student loan defaults sending shares of for-profit educators Strayer Education (Nasdaq: STRA ) and Corinthian Colleges (Nasdaq: COCO ) for a loop, many may not have noticed that K12's stock is up substantially over the past year.
In the long run, competition from other for-profit education players, including U-Phoenix operator Apollo Group (Nasdaq: APOL ) and subscription-only learning course provider Archipelago Learning (Nasdaq: ARCL ) , will come. But if K12 can get enough school districts hooked on its programming, then its first-mover advantage may prove unstoppable -- and the stock could look a lot closer to perfect.
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.