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 Riverbed Technology
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 Riverbed Technology.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||77.4%||Pass|
|1-Year Revenue Growth > 12%||44.1%||Pass|
|Margins||Gross Margin > 35%||76.2%||Pass|
|Net Margin > 15%||7.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||3.40||Pass|
|Opportunities||Return on Equity > 15%||9.3%||Fail|
|Valuation||Normalized P/E < 20||120.83||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With five points, Riverbed Technology has definite pluses and minuses for those seeking the perfect stock. The company has grown at light speed thanks to interest in cloud computing, but at a stratospheric valuation, it's tough to feel confident about buying shares today.
Riverbed has created technology that helps facilitate data transfer through the Internet. Just as Akamai Technologies
Riverbed does have competition from bigger companies including Cisco
Interestingly, Riverbed and Akamai recently announced that they would work together to integrate their respective technologies into package offerings. Given that cloud companies Rackspace Hosting
The rub, of course, is that Riverbed's shares trade at more than 100 times trailing earnings and 32 times current 2012 estimates. But if cloud computing takes off and Riverbed's growth continues, the company just might justify the stock's valuation in the years ahead.
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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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.