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 and then decide whether Nokia (NYSE: NOK ) 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 Nokia.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3.0%)||Fail|
|1-Year Revenue Growth > 12%||(17.8%)||Fail|
|Margins||Gross Margin > 35%||29.0%||Fail|
|Net Margin > 15%||(6.8%)||Fail|
|Balance Sheet||Debt to Equity < 50%||39.9%||Pass|
|Current Ratio > 1.3||1.40||Pass|
|Opportunities||Return on Equity > 15%||(23.3%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||9.2%||Pass|
|5-Year Dividend Growth > 10%||(14.2%)||Fail|
|Total Score||3 out of 9|
Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.
Since we looked at Nokia last year, the company has lost a point. But the downturn the mobile giant has suffered has been far worse than that score suggests, as a huge contraction in revenue and its loss of profitability have sent Nokia's shares plunging more than 60% in the past year.
For years, Nokia was the largest mobile-phone seller in the world. With a focus on low-priced models, the company took advantage of the boom in cellular phone networks as a cheaper way to build out communications infrastructure than extensive landline development in emerging-market countries. But in the first quarter of 2012, Nokia gave up its No. 1 position in mobile to Samsung.
More importantly, Nokia has lagged in the faster-growing smartphone segment, where Samsung and Apple (Nasdaq: AAPL ) are duking it out for supremacy. With those two giants now commanding a majority of smartphone market share, Nokia and Research In Motion (Nasdaq: RIMM ) have suffered huge share losses in the past year, with RIM seeing its share cut in half and Nokia dropping from a 23.8% share to just 8.2%.
Nokia is trying to reverse that trend. With its partnership with Microsoft (Nasdaq: MSFT ) , Nokia hopes that Windows-powered smartphones will be able to eat into Apple's and Samsung's revenue. The partnership gave AT&T (NYSE: T ) exclusive rights to sell its Lumia 900 smartphone, and with AT&T having incentives to deflate Apple's iPhones to put it in a more favorable bargaining position with respect to subsidies, its efforts to market the Lumia will obviously help Nokia.
For Nokia to start thriving again, it needs the Lumia to do well and provide a foundation for building sales in high-growth areas like China. Yet even with plans to introduce a Windows 8 tablet, Nokia still faces an uphill battle, and investors are rapidly losing patience with the struggling phone-maker.
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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