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 Quepasa (AMEX: QPSA) 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 Quepasa.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 135.2% Pass
  1-year revenue growth > 12% 155.9% Pass
Margins Gross margin > 35% 89.8% Pass
  Net margin > 15% (64.4%) Fail
Balance sheet Debt to equity < 50% 12.9% Pass
  Current ratio > 1.3 2.80 Pass
Opportunities Return on equity > 15% (25.4%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
       
  Total score   5 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Quepasa last year, the company has kept its five-point score. The company has made some progress in pulling up its return on equity, but its losses have expanded in the past year, showing how far the social media company still is from making money.

Quepasa started out as a pure play on social networking in Latin America, offering a Spanish language social website. But unlike Facebook (Nasdaq: FB) and LinkedIn (NYSE: LNKD), Quepasa has had substantial trouble building up a big, active user base. While typical Facebook users spend around six and a half hours using the service monthly, Quepasa users typically only looked at a handful of pages on the site in a given month. Moreover, Quepasa lacks the focus that business-driven LinkedIn has.

But last summer, Quepasa made a big move, buying the company behind myYearbook. After clearing some obstacles, the companies merged in November. So far, although the combination has contributed to a big jump in revenue for Quepasa, growth has fallen somewhat short of what many had hoped for.

Perhaps the biggest headwind for Quepasa's stock is simply the number of social media companies available to investors. With Jive Software (Nasdaq: JIVE) focusing on bringing social-media tools to businesses and Renren (NYSE: RENN) struggling to recover from a big share-price drop after the Chinese social-network company went public, Quepasa doesn't attract as much attention as other sites.

But attention isn't what will keep Quepasa improving. If it can convert myYearbook into a profitable opportunity, then it could prove to be the foundation of a successful business. That won't happen overnight, but the potential is there for Quepasa to look a lot closer to a perfect stock several years down the road.

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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