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 Ericsson (Nasdaq: ERIC ) 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 Ericsson.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.7%||Fail|
|1-Year Revenue Growth > 12%||13.6%||Pass|
|Margins||Gross Margin > 35%||37.3%||Pass|
|Net Margin > 15%||6.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||21.4%||Pass|
|Current Ratio > 1.3||1.93||Pass|
|Opportunities||Return on Equity > 15%||10.9%||Fail|
|Valuation||Normalized P/E < 20||13.09||Pass|
|Dividends||Current Yield > 2%||3.4%||Pass|
|5-Year Dividend Growth > 10%||3.7%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With six points, Ericsson puts in a fairly respectable performance. Amid a gold rush for intellectual property, the communications equipment maker represents a goldmine -- and it's looking to make the most of it.
Ericsson is the largest seller of mobile infrastructure products in the world. With the huge growth in mobile devices, the company is well-poised to take advantage, with more than 27,000 patents in its portfolio. Given that Google was willing to pay $12.5 billion for Motorola Mobility (NYSE: MMI ) -- which had only around 17,000 patents, it's easy to understand how dominant a position Ericsson is in right now.
Ericsson has actually taken steps to bolster its patent portfolio lately. Although it dissolved a joint venture with Sony, the company joined a consortium that included Apple (Nasdaq: AAPL ) , Research in Motion (Nasdaq: RIMM ) , and EMC (NYSE: EMC ) to buy up the patent assets of bankrupt Nortel Networks.
But the company is more than just a patent owner. Ericsson is looking for growth opportunities, having won the first LTE network infrastructure deal in India. Although the company will have to fight against competitors like Alcatel-Lucent (NYSE: ALU ) and the joint venture between Nokia (NYSE: NOK ) and Siemens, the emerging market has huge potential.
To keep improving, Ericsson needs to keep finding ways to boost its growth around the world. If it can succeed in doing so, then Ericsson may see a much higher score in the years ahead.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."