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%||22.5%||Pass|
|1-Year Revenue Growth > 12%||22.9%||Pass|
|Margins||Gross Margin > 35%||82.5%||Pass|
|Net Margin > 15%||20.9%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||1.72||Pass|
|Opportunities||Return on Equity > 15%||22.8%||Pass|
|Valuation||Normalized P/E < 20||33.17||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at F5 Networks last year, the company has kept its seven-point score. Concerns about potentially slower growth have pushed shares down recently, about 10% in the past year, but so far, the network specialist's business seems to be moving ahead strongly.
F5 is part of the wide array of companies seeking to help computer networks do their job more efficiently. Specifically, F5 has seen great success from its application delivery controllers, which help to take some of the stress off Web servers and balance loads across servers while also providing some security defenses. Although Citrix Systems (Nasdaq: CTXS ) and Radware have created footholds in the ADC space, F5 leads the market.
Where F5 has squarely set its sights is on larger competitors. Cisco Systems (Nasdaq: CSCO ) has proven vulnerable recently, as F5's ADC emphasis and Riverbed Technology's (Nasdaq: RVBD ) leadership in the wide-area network optimization field demonstrate. F5 actually competes with Riverbed in WAN optimization, showing the many fronts on which Cisco and Juniper Networks (NYSE: JNPR ) will need to defend their turf if they want to sustain their positions in the industry.
In its most recent quarter, F5 continued its positive trends. With a 22% boost in sales, the company's CFO called the quarter a return to "revenue acceleration," with telecommunications stocks providing a nice boost to results.
For F5 to improve, it would need to do something it's not likely to do soon: start paying a dividend. But as long as its growth pace continues, F5 will continue to look attractive for those who don't need income from their portfolios.
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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