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 eBay (Nasdaq: EBAY ) 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 eBay.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||14%||Fail|
|1-Year Revenue Growth > 12%||29.5%||Pass|
|Margins||Gross Margin > 35%||69.9%||Pass|
|Net Margin > 15%||28.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||11%||Pass|
|Current Ratio > 1.3||1.95||Pass|
|Opportunities||Return on Equity > 15%||21.3%||Pass|
|Valuation||Normalized P/E < 20||36.02||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at eBay last year, the company has gained two points. With returns on equity and revenue rising sharply, it's no big surprise to see the shares have risen by 60% over the past year.
eBay may have started out as a novelty with its online auctions, but it has emerged as the primary competitor to Amazon.com (Nasdaq: AMZN ) in online retail. With many of its sellers eschewing auctions to sell through its Buy It Now function, eBay has built up its core business and has dedicated resources toward improving its website's technology and making things more seller-friendly.
But most analysts agree that the real potential for eBay lies in mobile payments. The company's PayPal subsidiary has had a huge first-mover advantage in electronic payments and recently rolled out a trial system for accepting mobile payments with McDonald's (NYSE: MCD ) .
As you'd expect, though, the mobile payments business has plenty of competition. Start-up Square is now handling transactions for Starbucks (Nasdaq: SBUX ) , drawing battle lines in what could become a fierce price war among payment processors. That may seem like an uneven fight, but Square has backing from Visa (NYSE: V ) in the form of an undisclosed investment in the company as well as having one of its executives on Square's advisory board.
For eBay to keep improving, it needs to continue boosting growth in its core business as well as fostering innovation in mobile payments. As the industry expands, eBay should be able to hold onto its strong position there, as long as it can keep building new partnerships with retailers and other financial services companies.
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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