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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 Digital River (DRIV +0.00%) 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:
With those factors in mind, let's take a closer look at Digital River.
Factor |
What We Want to See |
Actual |
Pass or Fail? |
---|---|---|---|
Growth |
5-Year Annual Revenue Growth > 15% |
4.1% |
Fail |
1-Year Revenue Growth > 12% |
7.3% |
Fail | |
Margins |
Gross Margin > 35% |
84% |
Pass |
Net Margin > 15% |
3.7% |
Fail | |
Balance Sheet |
Debt to Equity < 50% |
57.6% |
Fail |
Current Ratio > 1.3 |
3.26 |
Pass | |
Opportunities |
Return on Equity > 15% |
2.2% |
Fail |
Valuation |
Normalized P/E < 20 |
32.56 |
Fail |
Dividends |
Current Yield > 2% |
0% |
Fail |
5-Year Dividend Growth > 10% |
0% |
Fail | |
Total Score |
2 out of 10 |
Since we looked at Digital River last year, the company hasn't improved on its 2-point score. Shareholders have also taken a big hit, with the stock down 40% over the past year.
Digital River has tried to make a splash in the cloud computing space, with a focus on helping businesses build a presence on the Internet by creating online stores and payment-acceptance systems. Given the growing popularity of online shopping, the company clearly has a huge potential market to tap.
But over the past year, Digital River has given investors repeated disappointments. Back in May, the stock sank when the company said weak international demand and higher costs would bring earnings down further than analysts had expected during the second quarter. Three months later, Digital River came back with a dour full-year outlook, raising questions about whether its partnership with Microsoft (MSFT +0.01%) will be as positive as many have hoped.
Still, Digital River is trying to move forward. Its agreement in September to buy LML Payment Systems (NASDAQ: LMLP) for $103 million will give it access to customers including Capital One (COF +0.01%), Wells Fargo (WFC 0.01%), and JPMorgan Chase, among many other smaller banks and financial institutions.
For Digital River to improve, it needs to find ways to differentiate itself from other companies offering business-to-business solutions on the technological front. Until it finds that magic formula, Digital River isn't likely to make much headway toward becoming a perfect stock 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.
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