Is Leap Wireless the Perfect Stock?

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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 Leap Wireless (NAS: LEAP) 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:

  • 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 Leap Wireless.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%22.1%Pass
 1-Year Revenue Growth > 12%9%Fail
MarginsGross Margin > 35%43.1%Pass
 Net Margin > 15%(32.8%)Fail
Balance SheetDebt to Equity < 50%366.5%Fail
 Current Ratio > 1.31.83Pass
OpportunitiesReturn on Equity > 15%(66.2%)Fail
ValuationNormalized P/E < 20NMNM
DividendsCurrent Yield > 2%0%Fail
 5-Year Dividend Growth > 10%0%Fail
    
 Total Score 3 out of 9

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.

With three points, Leap Wireless isn't giving shareholders a clear signal. The wireless carrier has tried to tap into a low-end market, but it's unclear whether it can stand up to the competition there.

Leap Wireless has a foothold in the rapidly growing industry of mobile connectivity. But unlike premium providers like AT&T (NYS: T) and Sprint Nextel (NYS: S) , Leap specializes in providing prepaid cellular service at lower costs than the extended contracts that more expensive carriers offer.

Unfortunately, that area hasn't been very lucrative, and it's still full of competition. With MetroPCS (NYS: PCS) and America Movil (NYS: AMX) competing for stingy low-end consumers, there's clearly not enough profits for everyone. Just in the past quarter, Leap announced that it lost huge numbers of broadband customers and that its attempt to move toward the more lucrative smartphone market has been slow going.

For value investors, the shares are now cheap enough that they may look attractive. But the long-term prospects for the stock look anything but perfect, and those seeking the ultimate stock should probably try to get a better connection elsewhere.

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 the best investments from the rest.

Click hereto add Leap Wireless 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."

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned.Motley Fool newsletter serviceshave recommended buying shares of AT&T. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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