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 ZAGG
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 ZAGG.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 139.2% | Pass |
| 1-Year Revenue Growth > 12% | 98.5% | Pass | |
| Margins | Gross Margin > 35% | 49.1% | Pass |
| Net Margin > 15% | 13.1% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 0.1% | Pass |
| Current Ratio > 1.3 | 2.02 | Pass | |
| Opportunities | Return on Equity > 15% | 42.5% | Pass |
| Valuation | Normalized P/E < 20 | 17.90 | Pass |
| Dividends | Current Yield > 2% | 0.0% | Fail |
| 5-Year Dividend Growth > 10% | 0.0% | Fail | |
| Total Score | 7 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
ZAGG has ridden the coattails of the smart-device revolution to a score of 7. Although the company faced a setback recently, that may simply have given investors a chance to snap up shares relatively cheaply.
ZAGG carved itself out a seemingly innocuous niche: making accessories for smartphones and tablets. But as the industry has grown, ZAGG has benefited from increasing demand for its products, especially the shields it makes to protect devices from scratches. As competitors like Apple
But in its iPad 2 launch, Apple decided it wanted a cut of the accessory pie. Its Smart Cover directly challenges one of ZAGG's products and represents the first shot in what may prove to be a longer battle for accessory revenue.
The question is whether ZAGG can maintain its place at the top of its niche. Maintaining margins is always tough in what is essentially a commodity business. And Apple's move suggests that aiming at the high-end consumer isn't going to be a free ride for ZAGG anymore.
Still, as much as investors are scared about Apple's recent move, ZAGG is well-diversified across a wide range of electronic devices. As long as people want smartphones and tablets with dust- and fingerprint-collecting screens, ZAGG's products should remain in demand.
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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