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 Cellcom Israel
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 Cellcom Israel.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.1%||Fail|
|1-Year Revenue Growth > 12%||(2.3%)||Fail|
|Margins||Gross Margin > 35%||44%||Pass|
|Net Margin > 15%||8.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||2393.6%||Fail|
|Current Ratio > 1.3||1.53||Pass|
|Opportunities||Return on Equity > 15%||196.9%||Pass|
|Valuation||Normalized P/E < 20||5.58||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||4 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Cellcom Israel suspended its dividend last month. Total score = number of passes.
With four points, Cellcom Israel isn't connecting well with investors. The recent suspension of its dividend certainly didn't help matters for the stock, which has lost around two-thirds of its value in the past year.
Telecom stocks have been some of the best ways to score great dividends. Just as Frontier Communications
But that came to at least a temporary end recently, as Cellcom Israel made the tough decision to suspend its dividend. With serious competition from Partner Communications
Like Frontier and Windstream in the U.S., Cellcom has substantial debt, and that gives it less flexibility to survive a drop in revenue. Still, with huge costs to build out infrastructure, debt is something that Cellcom will have to live with for a while.
For Cellcom to improve, it needs to do its best to survive government-imposed cuts in prices on its services while perhaps seeking to expand beyond Israel's borders. Without those growth prospects, current market conditions will make Cellcom's road a tough one for the foreseeable future.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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.