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 Taser
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 Taser.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 10.2% | Fail |
| 1-Year Revenue Growth > 12% | (12.4%) | Fail | |
| Margins | Gross Margin > 35% | 52.9% | Pass |
| Net Margin > 15% | (5.4%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 0% | Pass |
| Current Ratio > 1.3 | 5.11 | Pass | |
| Opportunities | Return on Equity > 15% | (4.3%) | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 3 out of 9 |
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.
When we looked at Taser last year, it had exactly the same score of three points, showing that the company has made no progress toward perfection since then. The self-defense company has certainly fallen short of the potential it seemed to have several years ago.
Taser is the company behind the stun gun. During 2008's recession, as the possibility of a global macroeconomic meltdown started looking increasingly likely, many producers of weapons saw a resurgence in interest, including firearms makers Smith & Wesson
For Taser, an increase in existing-customer orders has helped keep its shares up. But nevertheless, Sturm Ruger and the ammunition makers have done a much better job of turning sales into profits, with better margins and positive net income.
At least one insider at Taser thinks that the stock has some run to room from here. But until Taser can stay profitable, long-term investors can expect year after year of subpar financials and the returns that you'd expect from an underachieving stock. Don't expect perfection from Taser anytime soon.
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.
Click here to add Taser to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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."
