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.
What We Want to See
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.
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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