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 and then decide whether Baidu (Nasdaq: BIDU ) 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.
- Moneymaking 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 Baidu.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||72.9%||Pass|
|1-Year Revenue Growth > 12%||74.0%||Pass|
|Margins||Gross Margin > 35%||79.5%||Pass|
|Net Margin > 15%||46.8%||Pass|
|Balance Sheet||Debt to Equity < 50%||13.5%||Pass|
|Current Ratio > 1.3||4.69||Pass|
|Opportunities||Return on Equity > 15%||53.0%||Pass|
|Valuation||Normalized P/E < 20||40.52||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Baidu last year, the company has kept its 7-point score. But a drop in the stock's price of about 20% over the past year has started to bring its valuation to more reasonable levels, albeit still above what we prefer to see.
Baidu has been at the head of the class of online search in China for a long time. After it successfully repelled Google's (Nasdaq: GOOG ) attempts to penetrate the Chinese market, many investors figured Baidu could count on its near-monopoly position persisting for the long haul.
Recently, though, that's started to change. Qihoo 360 (NYSE: QIHU ) has made its own inroads into Chinese search, and unlike Sohu's (Nasdaq: SOHU ) previous efforts to use its browser to generate search results of its own, Qihoo's browser has much higher market share than Sohu's did. Baidu's stock has corrected sharply in response.
The next battleground for Baidu will be in mobile, where Baidu has a much smaller share of the mobile search market. With Apple (Nasdaq: AAPL ) having announced that it would add Baidu's search into its Safari mobile browser, Baidu is jumping on the coattails of the maker of the most successful mobile products ever made.
Baidu's main path to improvement will be to keep fighting on both the PC and mobile fronts to defend as much of its share as it can. As long as China continues to grow, though, Baidu can expect to get the lion's share of the benefit. Without any likely plans to pay a dividend, Baidu's about as close to perfection on our scale as it's going to get for the foreseeable future.
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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