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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide whether MasterCard (NYSE: MA ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 MasterCard.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||13.9%||fail|
|1-Year Revenue Growth > 12%||6.7%||fail|
|Margins||Gross Margin > 35%||100%||pass|
|Net Margin > 15%||31.1%||pass|
|Balance Sheet||Debt to Equity < 50%||0.5%||pass|
|Current Ratio > 1.3||1.97||pass|
|Opportunities||Return on Equity > 15%||48.9%||pass|
|Valuation||Normalized P/E < 20||17.99||pass|
|Dividends||Current Yield > 2%||0.3%||fail|
|5-Year Dividend Growth > 10%||13.6%*||pass|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. *Four-year annualized dividend growth since first dividend payment in Oct. 2006. Total score = number of passes.
MasterCard swipes in with a score of 7, making it look extremely attractive. That's not hard to understand when you consider that the company, along with main rival Visa (NYSE: V ) , found a way to make money from the boom in consumer borrowing without taking on the credit risk that has hampered major card issuers Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) .
Based on these measures, MasterCard's numbers shame even Visa, with higher returns on equity at a more reasonable valuation. But both companies face many of the same challenges. Along with American Express (NYSE: AXP ) , each faced antitrust investigations from the Justice Department, which MasterCard and Visa chose to settle. Each must deal with the impact of credit and debit card legislation. And each must compete not only with AmEx and Discover Financial, but also with innovative new payment systems, such as smartphone-based technology.
MasterCard has clearly enjoyed its duopoly status atop the card network industry. Changing times will force the company to work harder to sustain its financial strength, but if it can, it will prove itself a near-perfect stock for long-term shareholders.
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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