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 Nuance Communications (NAS: NUAN) 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 Nuance Communications.
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%
5 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of 5, Nuance Communications isn't coming in loud and clear, but you can still hear what it's saying. Th e company is a pioneer in voice recognition software and may finally be catching its lucky break.
Nuance has technology that helps computers recognize voices. If you've ever made an airplane reservation with an automated agent, you've heard Nuance in action. Now, though, smartphones are the new frontier for the company.
The big break for Nuance may come from the stock market's new No. 1 company. Last week, a Mac news site reported that Nuance would provide a speech-to-text feature in the upcoming update of Apple's (NAS: AAPL) iOS operating system. That would open up the voice recognition technology to millions of iPhone users. Certainly, similar Apple partnerships with radio frequency chip producer Skyworks Solutions (NAS: SWKS) and camera-sensor maker Omnivision (NAS: OVTI) have sent their respective stocks soaring.
Meanwhile, Nuance's most recent earnings report seems auspicious. Even though a big jump in revenue wasn't quite as much as analysts had hoped for, earnings beat expectations. If being included on the iPhone gives Nuance the growth boost it's hoping for, then a multiple of around 12 times forward earnings might actually be cheap, regardless of its normalized P/E.
Nuance may not be perfect, especially with no dividend. But the future looks bright, and if it can grab onto Apple's coattails -- or perhaps even see rumors of a possible Apple takeover take root -- then Nuance could get a lot better for investors sooner rather than later.
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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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Nuance Communications and Apple, as well as creating a bull call spread position in Apple. 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 adisclosure policy.
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