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 Iridium Communications
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 Iridium Communications.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 13% | Fail |
| 1-year revenue growth > 12% | 126.8% | Pass | |
| Margins | Gross margin > 35% | 66.3% | Pass |
| Net margin > 15% | 9% | Fail | |
| Balance sheet | Debt to equity < 50% | 29.6% | Pass |
| Current ratio > 1.3 | 1.72 | Pass | |
| Opportunities | Return on equity > 15% | 5% | Fail |
| Valuation | Normalized P/E < 20 | 19.17 | Pass |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total Score | 5 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Iridium Communications dials up a midrange score of five. You may have thought the satellite communications company was long since departed, but like a phoenix, Iridium is back and better than the original.
Iridium was a pioneer before its time, launching dozens of satellites to enable global communication just about anywhere. But because the service was expensive and clunky, the company, originally backed by Motorola Solutions
But at the last minute, an investor group bought the company's assets, saving the network. After emerging from bankruptcy in 2001, Iridium focused on niche areas of the data and voice transmission industry, including machine-to-machine applications, and went public in 2009. Now, the company counts a wide range of businesses among its clientele, ranging from defense companies Raytheon
Iridium certainly hasn't figured out a certain path to perfection, with plenty of uncertainty left about the exact shape its future course will take. But it looks quite a bit healthier than competitor Globalstar
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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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.
