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
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.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 40.6% | Pass |
| 1-Year Revenue Growth > 12% | 44.9% | Pass | |
| Margins | Gross Margin > 35% | 78.3% | Pass |
| Net Margin > 15% | 36.4% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 0.0% | Pass |
| Current Ratio > 1.3 | 2.43 | Pass | |
| Opportunities | Return on Equity > 15% | 22.9% | Pass |
| Valuation | Normalized P/E < 20 | 57.71 | Fail |
| Dividends | Current Yield > 2% | 0.0% | Fail |
| 5-Year Dividend Growth > 10% | 0.0% | Fail | |
| Total Score | 7 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Ctrip.com racks up a healthy score of seven points. Although smaller Chinese companies have faced challenges convincing investors of their ability to earn legitimate profits, Ctrip.com has been wowing shareholders with its travel services for years. The question going forward is whether the young company can keep up its blistering pace of growth.
Until now, Ctrip.com has been a growth investor's dream. Even priceline.com
But fast growth builds high expectations that are easy to miss. In its most recent quarter, Ctrip reported revenue growth of 39% on 59% higher net income, but it scared investors by projecting "only" 20% revenue growth for the current quarter.
Given its high earnings multiple, Ctrip does need to continue to post impressive growth in order to sustain its stock price. Rising competitors like Universal Travel Group
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.
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