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 Vodafone (Nasdaq: VOD ) 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 Vodafone.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9.3%||Fail|
|1-Year Revenue Growth > 12%||3.2%||Fail|
|Margins||Gross Margin > 35%||32.8%||Fail|
|Net Margin > 15%||17.4%||Pass|
|Balance Sheet||Debt to Equity < 50%||43.7%||Pass|
|Current Ratio > 1.3||0.63||Fail|
|Opportunities||Return on Equity > 15%||8.8%||Fail|
|Valuation||Normalized P/E < 20||10.67||Pass|
|Dividends||Current Yield > 2%||5.6%||Pass|
|5-Year Dividend Growth > 10%||5.1%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of just 4, Vodafone isn't giving shareholders a clear signal. But the telecom giant has connections all over the world and could see some big moves in the near future.
Vodafone has assets throughout the global marketplace. Along with its home market in the U.K., Vodafone most notably holds a 45% minority stake in its Verizon Wireless joint venture with Verizon (NYSE: VZ ) . You'll also find a big presence in countries including India and Australia.
But recently, the company has started to make some significant divestments. It sold its minority stake in French mobile operator SFR to media conglomerate Vivendi earlier this month. That, along with past stake-sales in China Mobile (NYSE: CHL ) , has left the company potentially poised for major strategic moves going forward.
The big question for Vodafone is what will happen with Verizon Wireless. Rumors have flown that the joint venture might start paying dividends to its partners, which could boost Vodafone's yield even higher than it is now. Given the U.S. competitive landscape versus AT&T (NYSE: T ) and Sprint Nextel (NYSE: S ) -- especially AT&T's pending purchase of T-Mobile -- the prospects of Vodafone buying out Verizon's interest in the wireless partnership may be unrealistic. But a higher dividend could easily push share prices higher.
Vodafone isn't a household name in the U.S., but in the increasingly global mobile market, it's a big player. The stock may not be perfect, but it may be worth investors' time to take a closer look at its shares.
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."