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 NII Holdings (Nasdaq: NIHD ) 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 NII Holdings.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||23.2%||Pass|
|1-Year Revenue Growth > 12%||20.0%||Pass|
|Margins||Gross Margin > 35%||60.6%||Pass|
|Net Margin > 15%||3.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||154.2%||Fail|
|Current Ratio > 1.3||1.67||Pass|
|Opportunities||Return on Equity > 15%||6.2%||Fail|
|Valuation||Normalized P/E < 20||10.82||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of five, NII Holdings finishes in the middle of the road on our 10-point scale. Yet some recent signs point to some potential challenges for the company going forward.
NII Holdings is a mobile company that operates networks in Latin America using the Nextel brand that Sprint Nextel (NYSE: S ) has licensed to it. The company has a presence in the big markets of Mexico and Brazil as well as other countries like Chile, Peru, and Argentina.
NII faces the same problem that U.S. mobile companies deal with: big competition. In Mexico, America Movil (NYSE: AMX ) is a mobile giant, claiming about 70% of Mexico's market share and about 25% in Brazil. In addition, European-based companies Telefonica (NYSE: TEF ) and Vodafone (Nasdaq: VOD ) have increasingly relied on their Latin American operations to provide profits, putting even more pressure on their competitors.
Unfortunately, NII is behind some of its rivals. Telefonica and American Movil have rolled out 3G networks, while NII has seen delays in its own 3G offering, expecting to launch services in Mexico, Brazil, and Chile this year.
In its most recent quarter, NII fell short on sales and announced an unexpected loss. Although the company is adding subscribers, it has had to boost spending on brand recognition and customer retention in light of competition.
Until NII Holdings can deliver solid guidance and catch up with its competitors, it will fall short of perfection. But with the huge growth potential in Latin America, the company still has a chance of improving itself in the years to come.
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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