Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Focus Media Holding
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
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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.
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Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
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Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
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Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
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Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Focus Media.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 49.9% | Pass |
| 1-Year Revenue Growth > 12% | 2.2% | Fail | |
| Margins | Gross Margin > 35% | 57.1% | Pass |
| Net Margin > 15% | 35.7% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 0% | Pass |
| Current Ratio > 1.3 | 4.94 | Pass | |
| Opportunities | Return on Equity > 15% | 8.6% | Fail |
| Valuation | Normalized P/E < 20 | 69.55 | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 5 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Focus Media hits the middle of our scale with a score of 5, but the Chinese media company has benefited more from the boom in the world's biggest emerging market than that score suggests.
Focus Media is a Chinese advertising powerhouse, using a variety of methods to reach Chinese consumers. At the end of last year, the company had 213,000 LCD displays and 336,000 posters and digital frames in elevators in 184 cities, and also uses electronic billboards and Internet advertising to deliver its ads.
Lately, that model has been strong for Focus Media. In its most recent quarter, the company delivered 45% higher revenue and a 71% jump in profits.
Still, the company faces plenty of competition in just about every venue imaginable. AirMedia
In the end, China is more than big enough to sustain multiple companies in the industry. But for now, Focus Media seems to have the inside edge, suggesting that it could be the best poised to move toward perfection in the years to come.
Keep searching
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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