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 F5 Networks (Nasdaq: FFIV ) 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 F5 Networks.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||25.2%||Pass|
|1-Year Revenue Growth > 12%||41.2%||Pass|
|Margins||Gross Margin > 35%||81.5%||Pass|
|Net Margin > 15%||19.4%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||2.02||Pass|
|Opportunities||Return on Equity > 15%||20%||Pass|
|Valuation||Normalized P/E < 20||45.70||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 seven, F5 is getting pretty close to perfection. Its shares trade at a high multiple, but recently, it has had plenty of growth to support those valuations.
F5 was originally known for its technology that helped computer networks manage incoming and outgoing traffic. That helped the company launch itself during the tech boom of the 1990s. More recently, F5 has broadened its portfolio to include more hardware and security features. The end result is that F5 has been taking market share away from competitors Cisco Systems (Nasdaq: CSCO ) , Brocade Communications (Nasdaq: BRCD ) , and Citrix Systems (Nasdaq: CTXS ) . Through 2010, the shares rode a huge wave up, rising more than sevenfold between March 2009 and the end of last year.
In January, though, the company announced quarterly results that spooked investors. Revenue came in less than estimated, despite the fact that adjusted earnings almost doubled from the year-ago quarter.
Going forward, F5's major attraction seems to be its ability to enable cloud-computing solutions. Lately, the stock has t raded in line with more clearly connected cloud plays like salesforce.com (NYSE: CRM ) and Akamai (Nasdaq: AKAM ) . Yet with Cisco having fallen on hard times, F5 has an opportunity not just in the cloud but in the core networking business.
At the pace at which technology advances, F5 can't count on its past success to translate into future perfection. But with so much going for it, F5 could easily earn those last three points in the long run.
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.