Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Alcatel-Lucent
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Alcatel-Lucent.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-year annual revenue growth > 15%||3.2%||Fail|
|1-year revenue growth > 12%||(10.9%)||Fail|
|Margins||Gross margin > 35%||34.8%||Fail|
|Net margin > 15%||(5.7%)||Fail|
|Balance sheet||Debt to equity < 50%||194.5%||Fail|
|Current ratio > 1.3||1.20||Fail|
|Opportunities||Return on equity > 15%||(25.7%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total Score||0 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Alcatel-Lucent had negative earnings during the period. Total score = number of passes.
On our 10-point scale, Alcatel-Lucent can't manage a single point. Sure, the networking space is competitive, but the fact that the company falls short on every key metric is still a surprise.
In some ways, Alcatel-Lucent's disappointingly slow growth is simply the result of a paradigm shift in the industry. During the past year, up-and-coming players like F5 Networks
But even among the top companies, Alcatel-Lucent falls short. Despite their own challenges, both Cisco Systems
Even though the networking space is a promising one for investors, Alcatel-Lucent has done little to distinguish itself. If you're looking for the perfect stock, you'd be better off looking elsewhere.
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.
Click here to add Alcatel-Lucent 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. Motley Fool Alpha has opened a short position on Juniper Networks, which is a Motley Fool Big Short short-sale recommendation. Motley Fool Alpha owns shares of Cisco Systems. The Fool has created a bull call spread position on Cisco. 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.