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 VanceInfo Technologies (NYSE: VIT ) 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 VanceInfo Technologies.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||57.7%||Pass|
|1-Year Revenue Growth > 12%||33.8%||Pass|
|Margins||Gross Margin > 35%||34.8%||Fail|
|Net Margin > 15%||7.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||3.81||Pass|
|Opportunities||Return on Equity > 15%||7.4%||Fail|
|Valuation||Normalized P/E < 20||36.67||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only four points, VanceInfo Technologies still has plenty of work to do. The company is in a promising industry, but conditions have been difficult over the past year and could continue to challenge investors in the year ahead.
VanceInfo is an information technology consulting firm located in China. The stock was an extremely strong performer in 2009 and 2010, rising sevenfold amid skyrocketing revenue and earnings.
But in 2011, things started to go wrong for the company. Its first-quarter results merely met expectations, showing slowing earnings growth. Shortly thereafter, VanceInfo found itself lumped into the Chinese small-cap fraud scare, as Longtop Financial and China MediaExpress were accused of accounting fraud. Along with Camelot Information Systems (NYSE: CIS ) , VanceInfo used the same auditor as the accused companies, and investors simply sold first and asked questions later in both cases.
A weak Chinese stock market added to VanceInfo's woes. Wage inflation slowed down revenue growth, and U.S. hostility toward foreign outsourcing didn't help the company. With Indian competitors Infosys (Nasdaq: INFY ) and Wipro (NYSE: WIT ) having more established businesses without any of the fraud concerns of Chinese companies, VanceInfo found itself with big losses in its share price.
More recently, the stock drew attention from bargain-hunters. But yesterday, VanceInfo gave poor guidance for current-quarter earnings that sent the shares down 8%.
For VanceInfo to get closer to perfection, it needs to shed the stigma of Chinese small-cap status and focus on growth both domestically in China and around the world. If it can show indisputable evidence of its success, then it should be able to rebound from its long decline.
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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