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 Nokia (NYSE: NOK ) 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 Nokia.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.6%||Fail|
|1-Year Revenue Growth > 12%||5.1%||Fail|
|Margins||Gross Margin > 35%||29.8%||Fail|
|Net Margin > 15%||4.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||29.5%||Pass|
|Current Ratio > 1.3||1.65||Pass|
|Opportunities||Return on Equity > 15%||8.8%||Fail|
|Valuation||Normalized P/E < 20||17.48||Pass|
|Dividends||Current Yield > 2%||6.8%||Pass|
|5-Year Dividend Growth > 10%||1.6%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Nokia calls in with just four points. The cell phone maker once dominated the industry, but it has been slow to evolve in the new smartphone revolution.
Nokia was an innovator in mobile technology, transforming its original paper mill business in the late 1960s. As late as 2008, the company had an estimated 40% market share of the global mobile market and also derived a significant portion of its revenue from related businesses like network infrastructure and enterprise solutions.
Nokia, however, has been slow to respond to advances in mobile technology from Apple (Nasdaq: AAPL ) and Research In Motion (Nasdaq: RIMM ) , whose offerings have dominated the high-end market for consumers and business, respectively. And with all the pressure that Google's (Nasdaq: GOOG ) Android will put on the industry, Nokia simply isn't keeping pace.
But Nokia isn't giving up. In February, it announced an alliance with Microsoft (Nasdaq: MSFT ) whereby Nokia would use Windows Phone 7 rather than developing its own in-house platform. The move could bring Nokia back into the limelight, although much depends on whether Microsoft can truly compete with Android and Apple's iOS.
For now, Nokia isn't perfect. But given the topsy-turvy world of mobile technology, all it would take is a single hit for Nokia to start moving in the right direction again.
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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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."