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 Nokia
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 Nokia.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3.0%)||Fail|
|1-Year Revenue Growth > 12%||(17.8%)||Fail|
|Margins||Gross Margin > 35%||29.0%||Fail|
|Net Margin > 15%||(6.8%)||Fail|
|Balance Sheet||Debt to Equity < 50%||39.9%||Pass|
|Current Ratio > 1.3||1.40||Pass|
|Opportunities||Return on Equity > 15%||(23.3%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||9.2%||Pass|
|5-Year Dividend Growth > 10%||(14.2%)||Fail|
|Total Score||3 out of 9|
Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.
Since we looked at Nokia last year, the company has lost a point. But the downturn the mobile giant has suffered has been far worse than that score suggests, as a huge contraction in revenue and its loss of profitability have sent Nokia's shares plunging more than 60% in the past year.
For years, Nokia was the largest mobile-phone seller in the world. With a focus on low-priced models, the company took advantage of the boom in cellular phone networks as a cheaper way to build out communications infrastructure than extensive landline development in emerging-market countries. But in the first quarter of 2012, Nokia gave up its No. 1 position in mobile to Samsung.
More importantly, Nokia has lagged in the faster-growing smartphone segment, where Samsung and Apple
Nokia is trying to reverse that trend. With its partnership with Microsoft
For Nokia to start thriving again, it needs the Lumia to do well and provide a foundation for building sales in high-growth areas like China. Yet even with plans to introduce a Windows 8 tablet, Nokia still faces an uphill battle, and investors are rapidly losing patience with the struggling phone-maker.
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.
Nokia is one way to bet on the tech revolution, but we think there's a better play. Look past the recent Facebook IPO to discover the tech IPO you should be buying. You can get the scoop from the Fool's latest special free report, which reveals the name of this potential giant. Let me invite you to read your free copy to get started.
Add Nokia to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of and creating bull call spread positions in Apple and Microsoft. We Fools don't 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.