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 Research In Motion (Nasdaq: RIMM ) 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 Research In Motion.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||53.1%||Pass|
|1-Year Revenue Growth > 12%||19.4%||Pass|
|Margins||Gross Margin > 35%||42.9%||Pass|
|Net Margin > 15%||14.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||1.94||Pass|
|Opportunities||Return on Equity > 15%||33.5%||Pass|
|Valuation||Normalized P/E < 20||4.08||Pass|
|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 Research In Motion last year, the smartphone maker has lost a single point. But the falling net margins that produced that loss are only one symptom of the big problems that the company is facing right now.
Once upon a time, Research In Motion dominated the smartphone space. Its BlackBerry was the phone of choice for security-conscious business users, whose corporate budgets opened the door to high-margin business for the smartphone maker. The company still boasts 70 million accounts worldwide.
But the past year has been pretty much an unqualified disaster for Research In Motion. Apple's (Nasdaq: AAPL ) iPhone, along with smartphones powered by Google's (Nasdaq: GOOG ) Android operating system, have seen their share of sales double in the past year, while BlackBerry has lost huge amounts of market share worldwide. RIM's PlayBook tablet hasn't performed as well as many had hoped, either. And worst of all, Research In Motion suffered a massive service outage in October that spanned the globe and threw a huge wrench into the company's reputation.
After its huge share-price drop, the biggest question for RIM shareholders has been whether the company would become an acquisition target. But with Microsoft (Nasdaq: MSFT ) having made a partnership with Nokia (NYSE: NOK ) , the Redmond giant doesn't seem like a candidate. Fellow Fool Rick Munarriz suggests that Dell (Nasdaq: DELL ) or Hewlett-Packard (NYSE: HPQ ) might make good buyers, but it all depends on their willingness to gamble on a comeback.
Research In Motion gives investors a vital lesson in how important it is for successful companies to keep looking forward. By missing out on changes in the smartphone market, RIM's fall from near-perfection is a sad story that could keep getting sadder in the coming year.
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."