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 ExlService Holdings
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 ExlService Holdings.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||28.3%||Pass|
|1-Year Revenue Growth > 12%||32.7%||Pass|
|Margins||Gross Margin > 35%||39.6%||Pass|
|Net Margin > 15%||11.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||13.9%||Pass|
|Current Ratio > 1.3||1.62||Pass|
|Opportunities||Return on Equity > 15%||13.3%||Fail|
|Valuation||Normalized P/E < 20||27.90||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With five points, ExlService Holdings puts in an average performance. The company has seen some impressive growth in recent years, but a combination of high valuations and no dividend keeps it well short of perfection.
ExlService provides outsourcing services to companies in various industries, with a concentration in insurance and financial services. For insurance companies, ExlService processes claims and provides customer service, while the company itself provides credit card and retail banking service and processing for banks. ExlService's largest clients in 2010 included Travelers
ExlService has plenty of competition. Not only does ExlService go up against direct outsourcing companies like Genpact
Unfortunately, shareholders aren't getting a strong vote of confidence from company insiders. ExlService announced that it would do a follow-on offering of 4 million shares, with three-quarters of the shares on offer coming from insiders seeking to cash out. Fortunately, insider holdings will still constitute about 40% of shares outstanding, so management will still have every incentive to keep the company growing.
ExlService isn't the best known company, but it could continue to grow if the trend toward outsourcing essential job functions continues. Even if it falls short of perfection, ExlService looks poised to keep improving into the future.
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.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of IBM. 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.