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 Ctrip.com (Nasdaq: CTRP ) 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 Ctrip.com.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||35.0%||Pass|
|1-Year Revenue Growth > 12%||21.4%||Pass|
|Margins||Gross Margin > 35%||77.0%||Pass|
|Net Margin > 15%||30.8%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.49||Pass|
|Opportunities||Return on Equity > 15%||16.3%||Pass|
|Valuation||Normalized P/E < 20||24.02||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Ctrip.com last year, the company has kept the same seven-point score. But a huge drop in the share price has allowed earnings to catch up to valuations as much slower growth has long-term investors worried about Ctrip's future.
The travel portal business has largely become about one winner and a bunch of losers. Priceline.com (Nasdaq: PCLN ) has leapt past analyst estimates quarter after quarter, as the company manages to grow profits at an even faster pace than revenue. Competitors Expedia (Nasdaq: EXPE ) and Orbitz (NYSE: OWW ) haven't been able to keep up, and their share prices have suffered as a result.
Even with the strength of a growing Chinese consumer base behind it, Ctrip has also failed to keep up with Priceline's growth. But higher costs, including marketing, administrative, and product-development expenses, have held Ctrip's bottom line back, and the resulting margin compression combined with slower revenue expansion has hit the stock hard. Ctrip is still more profitable than India's MakeMyTrip (Nasdaq: MMYT ) , but the Indian travel company is making longer strides toward becoming a major force in its own home emerging market.
For Ctrip to recover, it needs to get internal financial controls back in line. Only if it can start moving earnings back in the right direction will Ctrip make the final step toward becoming a perfect stock.
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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