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 salesforce.com (NYSE: CRM ) 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 Salesforce.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||34.7%||Pass|
|1-Year Revenue Growth > 12%||37.7%||Pass|
|Margins||Gross Margin > 35%||78.1%||Pass|
|Net Margin > 15%||(1.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||30.4%||Pass|
|Current Ratio > 1.3||0.79||Fail|
|Opportunities||Return on Equity > 15%||(2.1%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Salesforce last year, the company has kept its four-point score. Yet the stock has enjoyed about a 20% gain over the past year as the cloud-computing revolution continues to pick up steam.
Salesforce spearheaded the entire cloud-computing movement, which has gathered huge momentum in recent years. Although the company started with its namesake client-relationship-management software, the company has gone well beyond its original scope, providing a whole host of cloud services for a wide range of applications.
Salesforce isn't content to rest on its laurels, though. CEO Marc Benioff is counting on boosting sales to customers seeking to increase their social media presence, and as Facebook (Nasdaq: FB ) and LinkedIn (NYSE: LNKD ) have become more important tools in business as well as personal lives, ideas like location-based networks will almost inevitably take root and present more opportunities for Salesforce.
Still, Salesforce faces a lot of competition. Earlier this year, IBM (NYSE: IBM ) came out with its own cloud push with a device that allows an entire PC's contents to stream on the Internet. That includes software, which could potentially displace Salesforce's core cloud-software business. Moreover, rivals Oracle (Nasdaq: ORCL ) and Microsoft remain ever-present in the industry, with Oracle's purchases of Taleo and RightNow Technologies earlier this year squarely aimed at competing with Salesforce in the cloud.
For Salesforce to keep improving, it needs to do a better job of translating its strong revenue growth into profitability. It's not alarming to see a tech stock still in hypergrowth mode failing to make money, but eventually, Salesforce will have to become profitable if it wants to achieve 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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