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 Clearwire (NASDAQ: CLWR) 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.
- 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 Clearwire.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Growth |
5-year annual revenue growth > 15% |
NM |
NM |
|
1-year revenue growth > 12% |
23.3% |
Pass |
|
|
Margins |
Gross margin > 35% |
28.5% |
Fail |
|
Net margin > 15% |
(59.2%) |
Fail |
|
|
Balance sheet |
Debt to equity < 50% |
186.7% |
Fail |
|
Current ratio > 1.3 |
2.69 |
Pass |
|
|
Opportunities |
Return on equity > 15% |
(66.4%) |
Fail |
|
Valuation |
Normalized P/E < 20 |
6.36 |
Pass |
|
Dividends |
Current yield > 2% |
0% |
Fail |
|
5-year dividend growth > 10% |
0% |
Fail |
|
|
Total score |
3 out of 9 |
Source: S&P Capital IQ. NM = not meaningful; Clearwire reported no revenue five years ago. Total score = number of passes.
Since we looked at Clearwire last year, the company has doubled its score. The stock has jumped more than 40% in the past year, but most of those gains have come recently as a result of takeover speculation that now looks like it will become reality.
Clearwire provides wireless services via WiMAX technology. Sprint Nextel (S) is Clearwire's biggest customer and holds a minority stake in Clearwire, yet over years of a long and complicated relationship, Sprint has been reluctant to fully commit to the company. In fact, Sprint expects to stop making Clearwire-compatible devices after next year, calling into question the billions that Sprint has spent keeping Clearwire afloat given its huge debt load.
More recently, though, Sprint and Clearwire seem to be getting closer together rather than further apart. In October, Sprint sought to increase its stake in Clearwire to 50.8%, leaving Comcast (CMCSA -1.16%) and Intel (INTC 1.05%) as minority shareholders. Clearwire shareholders saw share-price gains, but they later fell back somewhat on disappointment that Sprint wouldn't buy the entire company, especially in light of Sprint's own deal to get a big capital infusion from SoftBank.
Yesterday, Sprint finally did just that, offering to buy the entire portion of Clearwire that it doesn't already own. Still, although Sprint bid $2.90 per share, Clearwire's stock now trades above that level, as shareholders hope for a competing bid. Clearwire does have valuable spectrum, which would be a great asset for AT&T (T 0.07%) or Verizon (VZ -0.43%) to pick up. Yet hopes of a bidding war are likely in vain, as the company is unlikely to attract other bidders with Sprint holding 48% of the shares.
Clearwire therefore has little chance of improving to become a perfect stock. But with Clearwire's spectrum, Sprint may have a better chance to stand up to its larger rivals.
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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