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%
||8 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total
score = number of passes.
we looked at Visa last year
, it only managed to rack up six points, so we've seen a big
improvement from the company's 2010 showing. A cheaper valuation
and a continuing rise in the company's dividend have helped the
credit card giant get closer to perfection.
Visa is the undisputed leader in the credit card business.
With more cards than
) , and
, Visa covers the globe and dealt with more than $3.3 trillion in
payments during 2010.
But Visa continues to face threats from several directions.
Caps on debit-card fees
could threaten their growth, especially as banks like
Bank of America
) have already instituted separate monthly charges for those who
use their debit cards.
The bigger concern is the growing battle to create an
(Nasdaq: GOOG) initially partnered with MasterCard on its
but ended up working with all the major card networks. But with
rival networks as well as
's(Nasdaq: EBAY) PayPal all fighting for supremacy in the area,
Visa will have to act strongly to defend its turf.
For now, though, Visa has everything it needs to succeed. With
strong sales growth, a clean balance sheet, and improving returns
on equity, all investors would need is a higher dividend to judge
Visa a perfect stock.
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.
to add Visa to My Watchlist, which can find all of our Foolish
analysis on it and all your other stocks.
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.
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