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 Sify Technologies (SIFY 1.83%) 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 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.
- Moneymaking 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 Sify Technologies.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Growth |
5-Year Annual Revenue Growth > 15% |
6.4% |
Fail |
|
1-Year Revenue Growth > 12% |
1.9% |
Fail | |
|
Margins |
Gross Margin > 35% |
44.3% |
Pass |
|
Net Margin > 15% |
4.7% |
Fail | |
|
Balance Sheet |
Debt to Equity < 50% |
29.6% |
Pass |
|
Current Ratio > 1.3 |
1.24 |
Fail | |
|
Opportunities |
Return on Equity > 15% |
(7.3%) |
Fail |
|
Valuation |
Normalized P/E < 20 |
NM |
NM |
|
Dividends |
Current Yield > 2% |
0% |
Fail |
|
5-Year Dividend Growth > 10% |
0% |
Fail | |
|
Total Score |
2 out of 9 |
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Sify Technologies last year, the company has dropped a point, as revenue growth has slowed considerably. The shares better reflect just how much difficulty the company is facing, with the stock having lost more than 60% of its value in the past year.
With a background in providing broadband Internet service in India, Sify now provides a wide variety of information technology services, including Web hosting and connectivity solutions. However, Sify hasn't followed the course that Infosys (INFY +0.54%) and Wipro (WIT 2.06%) have taken by trying to specialize in serving customers around the world to take advantage of cheaper domestic labor rates. Rather, Sify has generally focused on its own home market.
In general, though, Indian stocks have been a minefield for investors recently, as global macroeconomic worries take the bloom off emerging-market economies and their stock markets. Popular online portal provider Rediff.com (NASDAQ: REDF) has given investors slow but consistent growth, but investors have punished the stock to the tune of an 80% drop. Similarly, MakeMyTrip (MMYT 6.95%), which has tried to do for India what companies such as priceline.com and Ctrip.com have done for travelers in the U.S. and China, has sunk by more than half since topping out in 2011.
In its most recent quarter, Sify posted a strong profit. But the gains came entirely from the company's sale of its MF Global Sify Securities India affiliate, without which Sify would have posted a small loss.
For Sify to improve, it needs to find ways to encourage the explosion in technological advances that have occurred throughout much of the rest of the world. If something analogous to what's happened in the U.S. takes hold in India, then Sify has plenty of room to claim its fair share.
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 Sify Technologies to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
