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 AT&T (NYSE: T ) 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 AT&T.
Source: S&P Capital IQ. Total score = number of passes.
When we looked at AT&T last year, it had a much better score of 6. Falling margins and weaker returns on equity are responsible for the point drops, and the telecom's minimal growth in the past year continues a disturbing trend.
AT&T has cast its lot with the high-growth mobile trend, largely ceding its legacy landline business to smaller competitors like CenturyLink (NYSE: CTL ) and Frontier Communications (NYSE: FTR ) . Its focus on building out its wireless network was instrumental in gaining first-mover status to carry Apple's (Nasdaq: AAPL ) iPhone exclusively, although the tech giant has since opened up the field to make its iPhone 4S available on Verizon (NYSE: VZ ) and Sprint Nextel's (NYSE: S ) networks as well.
Unfortunately, AT&T hasn't delivered the numbers that investors have hoped for. In its most recent earnings report, the company fell short on revenue and only matched earnings-per-share estimates. But with the late release of the iPhone 4S, everyone expects the fourth quarter to come in much stronger, with the potential for record-breaking sales. In addition, Android-phone sales accounted for about half of the company's total handsets sold.
Despite the ongoing controversy with its proposed takeover of T-Mobile, AT&T's future success lies with its broader strategy to bring bundles of services, including voice, video, and high-speed data not just to mobile devices but to households as well. If it can do so while overcoming a spotty reputation for service, AT&T could find itself closer to perfection 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 the best investments from the rest.
Click here to add AT&T 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."
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