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Has Ancestry.com Become the Perfect Stock?

By Dan Caplinger - Oct 24, 2012 at 3:10PM

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Finding companies that have all the right stuff can produce winners.

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, and then decide whether Ancestry.com (ACOM) fits the bill.

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 the 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 Ancestry.com.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

23.8%

Pass

 

One-year revenue growth > 12%

22.7%

Pass

Margins

Gross margin > 35%

83%

Pass

 

Net margin > 15%

16.3%

Pass

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

0.58

Fail

Opportunities

Return on equity > 15%

20.6%

Pass

Valuation

Normalized P/E < 20

22.59

Fail

Dividends

Current yield > 2%

0%

Fail

 

Five-year dividend growth > 10%

0%

Fail

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Ancestry.com earlier this year, the company has kept its six-point showing. Yet although the stock has managed to make a modest gain, it appears investors won't be able to hang on to their shares much longer.

Ancestry.com was one of the success stories of the IPO world in recent years. Having gone public in late 2009, the stock more than tripled by mid-2011, and unlike short-lived shooting star Groupon (GRPN -5.61%), Ancestry managed to hold on to most of those gains, enjoying the networking benefits that LinkedIn (LNKD.DL) has used to hold its valuation. Strong revenue growth and big boosts in subscriber counts explained the surge.

But the company was starting to face some headwinds. With NBC Universal having canceled the family-tracking television show Who Do You Think You Are?, which Ancestry heavily sponsored, it wasn't clear how Ancestry would best get the word out to keep subscriber numbers climbing.

Perhaps in response, reports surfaced during the summer that the company was looking for a buyer, with Facebook (FB -8.66%) and Google (GOOGL -5.91%) named among those potentially interested. In the end, though, private-equity company Permira agreed to buy Ancestry for $32 per share -- a thin 10% premium over Friday's closing price.

Ancestry will likely never get a chance to become a perfect stock, but it'll be interesting to see what happens to the company going forward. Given the need for private equity to have an exit strategy, you could easily see Ancestry among the land of public companies again in the years to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click here to add Ancestry.com to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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Stocks Mentioned

Ancestry.com LLC Stock Quote
Ancestry.com LLC
ACOM
LinkedIn Corporation Stock Quote
LinkedIn Corporation
LNKD.DL
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
FB
$179.23 (-8.66%) $-17.00
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,097.93 (-5.91%) $-131.83
Groupon, Inc. Stock Quote
Groupon, Inc.
GRPN
$11.45 (-5.61%) $0.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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