Has AsiaInfo-Linkage Become the Perfect Stock?

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 AsiaInfo-Linkage (Nasdaq: ASIA  ) 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.
  • Moneymaking 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 AsiaInfo-Linkage.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 33.2% Pass
  1-Year Revenue Growth > 12% 9.8% Fail
Margins Gross Margin > 35% 40.7% Pass
  Net Margin > 15% 7.3% Fail
Balance Sheet Debt to Equity < 50% 0.6% Pass
  Current Ratio > 1.3 2.63 Pass
Opportunities Return on Equity > 15% 3.5% Fail
Valuation Normalized P/E < 20 36.06 Fail
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at AsiaInfo-Linkage last year, the company lost 3 full points. A big slowdown in sales growth and plunging margins didn't help the telecom IT provider's score, even though the stock has been able to hang on to gains it earned earlier this year.

As a small Chinese company, AsiaInfo has had to deal with the same investor concerns about fraud that have plagued many of its compatriots. Yet with its close relationship with telecom giant China Mobile (NYSE: CHL  ) , as well as strong ties to China Mobile rivals China Unicom (NYSE: CHU  ) and China Telecom, AsiaInfo doesn't really look like the companies that have seen fraud allegations stick.

Still, AsiaInfo has had to deal with tough times. This time last year, AsiaInfo said its future results would fall short of expectations, although some of those concerns didn't pan out as much as investors feared.

All year long, though, potential for a possible takeover has whipsawed the stock. The company got one offer in January, and rumors have surfaced on a couple different occasions. But at least so far, none of the interested parties has apparently moved forward.

For AsiaInfo to improve, it needs to start venturing outside its comfort zone and challenge competitors Comverse Technology (Nasdaq: CMVT  ) and Convergys (NYSE: CVG  ) on the international front. Moving beyond China may be AsiaInfo's best chance to grow, absent a successful takeover bid.

Keep searching
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.

AsiaInfo-Linkage may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's popular special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Add AsiaInfo-Linkage to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of China Mobile. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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