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 SINA (Nasdaq: SINA ) 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 SINA.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||17.6%||Pass|
|1-Year Revenue Growth > 12%||17.0%||Pass|
|Margins||Gross Margin > 35%||53.8%||Pass|
|Net Margin > 15%||(67.7%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0.2%||Pass|
|Current Ratio > 1.3||4.43||Pass|
|Opportunities||Return on Equity > 15%||(27.0%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at SINA last year, the company has kept its five-point score despite putting in some massive losses on its bottom line. Shareholders have equally lost confidence in the stock, which has lost half its value in the past year.
SINA was one of the pioneers in China's Internet revolution. Alongside search giant Baidu (Nasdaq: BIDU ) , SINA built up a successful portal and media-advertising business as China went through its boom phase.
But recently, the company has moved strongly into the social-networking space with its Twitter-like Weibo microblogging service. Although that area has a lot of promise, it comes with some huge costs, and investors aren't entirely happy with just how much money SINA plans to invest in the platform.
One reason for the nervousness is that competition could become fierce. China's Renren (NYSE: RENN ) is already well established in the social-media space, and although Facebook (Nasdaq: FB ) hasn't followed through on rumors of a big entry into the Chinese market, the possibility certainly will continue to worry SINA shareholders. Meanwhile, Sohu.com (Nasdaq: SOHU ) has tried to take market share away from SINA in the search engine space, and Baidu represents an ongoing threat in all directions.
Moreover, being in China comes with specific challenges. The Chinese government required SINA to verify the identity of all its users, which adds expense but also makes its data far more valuable for ad purposes.
For SINA to meet its full potential, it needs for current plans to monetize Weibo to succeed. Without a turnaround in its bottom line soon, the company may never 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 the best investments from the rest.
SINA isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add SINA to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.