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 Aruba Networks
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 Aruba Networks.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 35.0% | Pass |
| 1-Year Revenue Growth > 12% | 36.4% | Pass | |
| Margins | Gross Margin > 35% | 70.0% | Pass |
| Net Margin > 15% | 12.7% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 0% | Pass |
| Current Ratio > 1.3 | 3.64 | Pass | |
| Opportunities | Return on Equity > 15% | 17.4% | Pass |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 6 out of 9 |
Source: S&P Capital IQ. NM = not meaningful due to negative normalized earnings. Total score = number of passes.
Since we looked at Aruba Networks last year, the company has picked up a point. Improving returns on equity were responsible for the gain, although much of those gains came from a one-time tax benefit, and the stock just barely broke even over the past year.
Enterprise mobility has become a catchphrase of the mobile revolution, and Aruba has reaped many of the rewards from the trend. As corporate policies have relaxed by allowing employees to use their own personal smartphones and other mobile devices rather than having to stick with company-provided hardware, there's been a shift away from high-security devices from Research In Motion
Unfortunately, there's a lot of uncertainty about whether the good times will last. Earlier this year, Aruba shares hit new lows as fears about a general slowdown in information technology spending spurred declines in the entire sector. Yet Aruba has been able to succeed in competing against its much larger rivals, taking away business from Cisco and Juniper Networks
For Aruba to improve, it needs to translate its huge sales growth into consistent profitability. That's been a long time coming, but if Aruba can finally make the grade, it stands to advance even closer to perfection.
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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