Is Dell the Perfect Stock?

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 if Dell (Nasdaq: DELL  ) 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 Dell.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 2% Fail
  1-Year Revenue Growth > 12% 16.2% Pass
Margins Gross Margin > 35% 18.6% Fail
  Net Margin > 15% 4.3% Fail
Balance Sheet Debt to Equity < 50% 77.2% Fail
  Current Ratio > 1.3 1.49 Pass
Opportunities Return on Equity > 15% 39.3% Pass
Valuation Normalized P/E < 20 14.33 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With just four points, Dell falls well short of perfection. The company has a long and illustrious history as one of the fastest-rising stocks of the 1990s, but since the tech bust, things just haven't been the same for the company or its shareholders.

In the race to provide PCs at the lowest cost, Dell has earned a reputation as a value leader. Competitor Hewlett-Packard (NYSE: HPQ  ) has higher market share in the U.S., and Dell comes in No. 3 on the world sales list. But despite having lower margins that HP, Dell still takes the lead in return on equity, thanks in large part to a higher debt load than its bigger rival.

The problem, though, is that PCs are falling out of favor, and Dell doesn't have a strong entry into the tablet market. As Apple's (Nasdaq: AAPL  ) iPad and the Xoom from Motorola Mobility (NYSE: MMI  ) gain popularity, increasingly powerful tablets might eventually supplant Dell PCs. If so, then the big lead Dell's competitors in the tablet space have may be too big for the PC giant to catch up. The company's share price, still well off its levels from 10 years ago, reflects that fear.

The question going forward is whether tablets gain traction with Dell's core customer base. If so, then Dell could look even less perfect in the years to come.

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.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool Options has recommended a bull call spread position on Apple, which is a Motley Fool Stock Advisor recommendation. The Fool has written puts on and owns shares of Apple. We Fools may not 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.


Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 14, 2011, at 11:47 AM, callitlikeiseeit wrote:

    Dell's actually a beneficiary of those things you say are working against it.

    So many people only see what is on the outside. With the cute and shiny end devices consuming all of the content that so many other people are producing, Dell, Juniper, Cisco, IBM, HP, Brocade -- and many others -- are benefitting. For those end devices, switches, routers, storage, networks, cell towers, data storage devices and servers are required... and they produce much more profit than the devices that end users/consumers are creating data demand with.

  • Report this Comment On March 14, 2011, at 9:48 PM, Lambarde wrote:

    Perfect? That is by far the most "foolish" headline I've read in ages! I'm not sure I "get" this article at all. Dell has been the most perfectly awful stock to own. Passé product lines and Walmart pricing have driven this loser to depressing lows. Half of our investment is gone and the shares pay a fat 0 dividend, yet MSN, e.g., rates it a 10. What gives? Where does an investor find reality?

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