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 E-Commerce China Dangdang (NYSE: DANG ) 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 Dangdang.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||68.7%*||Pass|
|1-Year Revenue Growth > 12%||58.6%||Pass|
|Margins||Gross Margin > 35%||13.8%||Fail|
|Net Margin > 15%||(6.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||13.0%||Pass|
|Current Ratio > 1.3||1.50||Pass|
|Opportunities||Return on Equity > 15%||(17.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes. * Four-year growth rate.
With only four points, Dangdang hasn't gotten close to perfection yet. But the Chinese online retailer hopes to find the same success that Amazon.com (Nasdaq: AMZN ) has had in the U.S. and elsewhere.
In recent years, China has gone through its own Internet boom, with a number of companies coming on the scene as rough analogues to similar U.S.-based businesses. Given the huge success that Baidu (Nasdaq: BIDU ) has had not only in penetrating the Chinese online search market but in keeping out foreign competitors, a large group of Chinese Internet IPOs have come to market in the past few years. While Youku.com (Nasdaq: YOKU ) has sought to emulate YouTube and Renren (NYSE: RENN ) gets billed as the Facebook of China, Dangdang is trying to do for Chinese online retail what Amazon did for U.S. online retail. So far, none of the three has had anywhere near the success of Baidu, let alone their respective American counterparts.
Dangdang has taken several pages out of Amazon's playbook. Dangdang started as a book seller but has since moved on to offer a broad array of merchandise, along with fast delivery and even an e-book platform. But unlike Amazon, Dangdang is far from the largest player in Chinese online retail. With Alibaba's Taobao commanding almost half of China's retail market share and 360buy planning an IPO, Dangdang could find itself as an also-ran in the long run. That leaves Dangdang plenty of room to grow, but there are substantial obstacles in its path.
Unfortunately, Dangdang's financial results haven't been encouraging. The company has missed expectations in three straight quarters, posting big deficits despite its healthy revenue growth.
Like so many of its recently public Chinese peers, Dangdang has disappointed early investors with its lackluster results. For it to improve, Dangdang needs to build up market share and present a real challenge to Taobao and other competitors. If it can succeed in that, then becoming profitable is the next step toward trying to become 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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