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 Garmin
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 Garmin.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 12.6% | Fail |
| 1-Year Revenue Growth > 12% | (7.7%) | Fail | |
| Margins | Gross Margin > 35% | 49.4% | Pass |
| Net Margin > 15% | 18.2% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 0% | Pass |
| Current Ratio > 1.3 | 2.79 | Pass | |
| Opportunities | Return on Equity > 15% | 16.5% | Pass |
| Valuation | Normalized P/E < 20 | 21.81 | Fail |
| Dividends | Current Yield > 2% | 4.8% | Pass |
| 5-Year Dividend Growth > 10% | 32% | Pass | |
| Total Score | 7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Garmin last year, the company has lost its way, falling two points. Another big drop in revenue over the past year pulled down its long-term track record, yet a big rise in its stock price has Garmin trading at a valuation above where we'd like to see it.
Garmin gets the lion's share of its revenue from the automotive navigation market. But the company has suffered from the increasing availability of navigational apps available from Apple
The bigger challenge, though, is that cars will soon have full-fledged premium Internet connections of their own. That poses an even bigger threat to premium hardware sellers Garmin and Sirius XM
But interestingly, Garmin is looking to the fitness industry as a growth niche. The company's Forerunner watch series, which embeds a GPS to help track activity, has enjoyed a big sales increase recently.
Garmin still ranks close to perfection on our 10-point scale, but it's moving in the wrong direction. Unless it can reestablish itself as a dominant force in the industry, Garmin risks seeing its moat dry up and losing its competitive edge to the new generation of technological advances.
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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