Has Dell Become the Perfect Stock?

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 Dell (Nasdaq: DELL  ) 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 Dell.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 1.6% Fail
  1-Year Revenue Growth > 12% 0.9% Fail
Margins Gross Margin > 35% 22.3% Fail
  Net Margin > 15% 5.6% Fail
Balance Sheet Debt to Equity < 50% 103.8% Fail
  Current Ratio > 1.3 1.34 Pass
Opportunities Return on Equity > 15% 41.9% Pass
Valuation Normalized P/E < 20 11.54 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Dell last year, the computer company has dropped a point. Slower growth has weighed on the company during the past year, even though the stock has performed reasonably well.

Dell has had to deal with a sea change in the computer business. A decade and more ago, Dell and Hewlett-Packard (NYSE: HPQ  ) were well-positioned to take advantage of the surge in PC demand, with the rise of the Internet encouraging ordinary people to buy computers. But now, tablets from Apple (Nasdaq: AAPL  ) and Amazon.com (Nasdaq: AMZN  ) along with a wide array of smartphones and other mobile devices are a threat to Dell, as the company has largely missed the mobile revolution. Apple's dominance in tablets was enough to force HP to dump its tablet offering at a huge discount last fall, and Dell already discontinued its Streak after a delayed launch and criticism from users.

Now that Apple has started paying a dividend, some investors think that Dell might be next. But even though its cash outweighs its substantial debt, Dell might prefer to try to use that cash to generate internal growth through expansion projects.

One of those projects may be its new Ultrabook. Established as an Intel (Nasdaq: INTC  ) initiative to fight against Apple's growing market share, the Ultrabook concept combines full-power computers with extended battery life and thin, light notebook specs.

If the Ultrabook idea takes off, it could rescue Dell from a commodity-selling existence. The low-end niche provides solid sales, but with margins compressed, Dell needs to try to move up to higher-ticket items to get moving back in the right direction.

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.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Apple, Amazon.com, and Intel. Motley Fool newsletter services have recommended buying shares of Amazon.com, Apple, and Intel, as well as creating a bull call spread position in Apple and writing covered calls on Dell. 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.


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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 28, 2012, at 11:20 AM, haysdb wrote:

    I think Michelle Dell should shut the company down and return the money to its shareholders.

  • Report this Comment On March 28, 2012, at 11:21 AM, jalbertbrn wrote:

    What an absolutely miserable article. You pick a stock that clearly does not have the qualities that you are looking for and then tell us what we already know for the hell of it. How does garbage like this get published?

  • Report this Comment On March 28, 2012, at 1:06 PM, applefan1 wrote:

    The perfect stock? I don't think so. Go to the chart and view Dell share price since their inception. They peaked in 2000 and then at a lower peak in 2005. and then bottomed out not too long ago. Then go to Apple stock and look at their graph for share price since their inception. It is a log curve. Exponential growth that hasn't peaked yet and the industry analysts are suggesting at least 3 to 5 more years of exponential growth. Where would you put YOUR money? Remember how Dell got sued for knowingly selling faulty computers for 10 years and you think they have changed? They use cheap grade components. Have you seen the keyboards on their computers? About the cheapest keyboards on the planet. Their PC business is low margin, just like HP. IBM already figured out to sell that end of the business as they had other ways to make money since the PC business wasn't IBM's cash cow. What are to do when their cash cow is anorexic?

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