Every investor would love to stumble upon the perfect stock.
But will you ever really find a stock that provides
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
) 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:
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.
Higher sales mean nothing if a company can't produce profits
from them. Strong margins ensure that company can turn revenue
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
Return on equity helps measure how well a company is finding
opportunities to turn its resources into profitable business
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.
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
With those factors in mind, let's take a closer look at
What We Want to See
Pass or Fail?
||5-Year Annual Revenue Growth > 15%
||1-Year Revenue Growth > 12%
||Gross Margin > 35%
||Net Margin > 15%
||Debt to Equity < 50%
||Current Ratio > 1.3
||Return on Equity > 15%
||Normalized P/E < 20
||Current Yield > 2%
||5-Year Dividend Growth > 10%
||6 out of 10
Source: S&P Capital IQ. Total score = number of
we looked at Visa last year
, the company gave back the two points it
picked up between 2010 and 2011
. The stock's nearly 60% rise took valuations above comfortable
levels, while net margins plunged.
As the largest credit card network,
Visa has been at the forefront of the
in how people pay for things over the past several decades. With
credit cards and, more recently, debit cards having become
increasingly popular over checks and cash transactions, Visa has
put itself in position to take a small cut of the trillions of
dollars that people around the world spend every year. Moreover,
it has maintained its substantial lead over perennial No. 2
But the world isn't standing still, as competitors rally
around mobile payment processing and other innovative payment
's(Nasdaq: EBAY) PayPal have
teamed up to offer PayPal-based payments
at any merchant that accepts Discover's cards, which should help
both companies become a bigger threat to Visa. Although the
company has joined forces with card-network rivals MasterCard,
) as part of a Mobile Payments Committee to fight off
non-card-based competition, Visa has already demonstrated its
strength in the mobile area, as a recent research report showed
that Visa is the top consumer choice for mobile wallets.
One controversial area remains the merchant fees that Visa
charges. Visa and MasterCard made a settlement offer recently
that included billions in payments to merchants, as well as
giving them the right to add surcharges to credit card
transactions. But some major retailers have urged their peers to
reject the offer, and with alternatives like upstart Square
popping up and gaining traction, Visa needs to be careful not to
take its dominance for granted.
For Visa to improve, it needs to get margins moving back in
the right direction. Mobile payments could achieve that end, but
only if Visa can fight back against the competition and
demonstrate its industry leadership once more.
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.
Visa may not be perfect, but we've got some other ideas you
might like better. Let me invite you to learn about three smart
long-term stock plays in the Fool's popular special report. It's
yours for the taking and is absolutely free, but don't miss out
-- click here and read it today.
to add Visa 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. Motley Fool newsletter services have
recommended buying shares of eBay and Visa, as well as writing a
covered strangle position in American Express. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights
reserved. The Motley Fool has a