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%||27.5%||Pass|
|1-Year Revenue Growth > 12%||19.7%||Pass|
|Margins||Gross Margin > 35%||81.9%||Pass|
|Net Margin > 15%||10.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||8.39||Pass|
|Opportunities||Return on Equity > 15%||7.8%||Fail|
|Valuation||Normalized P/E < 20||48.72||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Acme Packet last year, the company has lost two points. Drops in net margin and return on equity account for the drop, but more troubling is the stock's loss of more than 60% over the past year.
This time last year, Acme Packet seemed to be in the right industry at the right time. With the buyout of Skype, it seemed as if voice-over-Internet applications would become hot again, and Acme Packet's quality-enhancing, session-border-controller technology would play an important role in pushing them forward.
But late last year, the company started missing on its guidance. In the third quarter, Acme blamed the shortfall on AT&T (NYSE: T ) delaying an order. But when fourth-quarter results also came in light, it raised questions about whether AT&T and Verizon (NYSE: VZ ) remain committed to Acme's equipment.
Earlier this month, though, the company put some of those concerns to rest in its first-quarter report. Verizon's share of revenue rose to 16% from around 10% in past quarters. More importantly, the company is helping MetroPCS (NYSE: PCS ) roll out voice-over-LTE wireless technology, which it expects to go live later this year.
Looking forward, Acme still maintains a substantial market share lead over Cisco Systems (Nasdaq: CSCO ) , which is facing its own challenges. But Acme needs to take strong action to stay on top of this rapidly evolving area, or else it could lose its best chance to become a perfect stock.
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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