Has City Telecom Become the Perfect Stock?

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 City Telecom (Nasdaq: CTEL  ) 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 City Telecom.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 8.2% Fail
1-Year Revenue Growth > 12% 6.8% Fail
Margins Gross Margin > 35% 87.4% Pass
Net Margin > 15% 18.7% Pass
Balance Sheet Debt to Equity < 50% 0.7% Pass
Current Ratio > 1.3 1.75 Pass
Opportunities Return on Equity > 15% 18.0% Pass
Valuation Normalized P/E < 20 15.66 Pass
Dividends Current Yield > 2% 6.5% Pass
5-Year Dividend Growth > 10% 34.4% Pass
Total Score 8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at City Telecom last year, the Hong Kong telecom has made huge progress toward reaching perfection, climbing three points. A cheaper valuation has combined with better margins and returns on equity to make the stock look more attractive.

City Telecom weighs in as one of the top two telecom providers in Hong Kong. With its unique corporate culture, the company aspires toward what it calls the "Big Hairy Audacious Goal" of becoming the largest IP provider by 2016.

Even if it doesn't lead its industry yet, City Telecom has done an excellent job of keeping net margins extremely high, generating profits that it then pays out to shareholders. By contrast, U.S. telecoms Frontier Communications (Nasdaq: FTR  ) and CenturyLink (NYSE: CTL  ) have razor-thin margins that compress their returns on equity and provide much less support for their dividends.

For investors seeking dividends from international telecom stocks, you can certainly get higher yields. But Europe's France Telecom (NYSE: FTE  ) and Telefonica (NYSE: TEF  ) find themselves at least partially exposed to a potential recession on the continent, while at least for now, China's growth continues at a healthy pace. That puts City Telecom in an enviable position and has almost everything we're looking for in a perfect stock.

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.

City Telecom looks like a good prospect, but you shouldn't put all your eggs in one basket. Learn about three more promising stocks for the long haul in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add City Telecom to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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