Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide whether Sprint Nextel
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Sprint.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.4%||fail|
|1-Year Revenue Growth > 12%||(2.1%)||fail|
|Margins||Gross Margin > 35%||47.1%||pass|
|Net Margin > 15%||(10.9%)||fail|
|Balance Sheet||Debt to Equity < 50%||130.0%||fail|
|Current Ratio > 1.3||1.23||fail|
|Opportunities||Return on Equity > 15%||(20.8%)||fail|
|Valuation||Normalized P/E < 20||NM||fail|
|Dividends||Current Yield > 2%||0.0%||fail|
|5-Year Dividend Growth > 10%||0.0%||fail|
|Total Score||1 out of 10|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Sprint had negative earnings during the period. Total score = number of passes.
With a score of 1, Sprint is about as far from perfect as you can get. Unfortunately, the company simply hasn't been able to handle the competitive pressures it has faced in recent years.
To outsiders, Sprint may look like it's ahead of the game. With the help of Clearwire
Meanwhile, Sprint isn't exactly in a position to clean up any messes right now. It doesn't pay a dividend like most of its telecom competitors and has an ugly balance sheet. Some think its last hope might be a combination with Deutsche Telecom's T-Mobile, since Sprint has the 4G spectrum that T-Mobile needs, and T-Mobile would bring critical mass back to Sprint's subscriber base.
At this point, investors looking for growth from mobile technology would be better served by Google
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.
Click here to add Sprint 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 Fool owns shares of Google, which is a Motley Fool Inside Value recommendation and a Motley Fool Rule Breakers choice. Sprint is a former Inside Value pick. 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.
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