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 Ebix
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 Ebix.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||42.6%||Pass|
|1-year revenue growth > 12%||29.5%||Pass|
|Margins||Gross margin > 35%||80.1%||Pass|
|Net margin > 15%||43.9%||Pass|
|Balance sheet||Debt to equity < 50%||10.2%||Pass|
|Current ratio > 1.3||1.77||Pass|
|Opportunities||Return on equity > 15%||23.6%||Pass|
|Valuation||Normalized P/E < 20||17.84||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total Score||8 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of eight, Ebix does as well as a nondividend-paying stock can do on this scale. Yet despite its obvious financial strength, the shares have done an about-face recently after soaring for a long time.
In the rough and tumble world of insurance, Ebix has sought to be a game changer. If you've ever shopped for insurance, you know how difficult it can be just to get a simple price quote. Your insurance broker has to talk with insurance carriers, which in turn move information between customer reps and underwriters to come up with a price. Meanwhile, once you get coverage, the company may need to get reinsurance to hedge its risk. All those players are a nightmare for those wanting quick answers.
In simple terms, Ebix's software solves that information bottleneck. Just as broader-based enterprise software companies such as salesforce.com
But some people think that Ebix's story is too good to be true. In March, an anonymous team of stock researchers bashed the company, calling into question its accounting practices, tax strategy, and management team. Since March, the stock has lost more than 40% of its value.
There's no doubt that Ebix has plenty of risk. But thanks to recent skepticism, shares now trade at a big discount to where they were just a few months ago. Ebix may not be perfect, but it's an attractive enough story to warrant closer attention.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Ebix. Motley Fool newsletter services have recommended buying shares of Ebix, salesforce.com, VMWare, and Rackspace Hosting, while a separate service has recommended shorting salesforce.com. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.