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 and then decide whether Kenexa (NAS: KNXA) 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 Kenexa.
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 9
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Kenexa had negative earnings for the period. Total score = number of passes.
With a score of 5, Kenexa hires itself a reasonable score. But the company has gotten crushed by a slow job market that appears only to be getting worse.
Kenexa specializes in software for human-resource departments. Its software helps companies recruit and retain employees, as well as tracking all the forms and other documents that new hires need to complete. Kenexa's acquisition of Salary.com last year also gave it an online presence. The company counts Unilever (NYS: UL) , Yum! Brands (NYS: YUM) , and News Corp. (NAS: NWSA) among its customers.
Unfortunately, Kenexa relies on a healthy job market for its success, and lately, the U.S. has had anything but a strong employment picture. Despite an optimistic earnings report a few weeks back, news that the U.S. economy may well be slipping back into a double-dip recession sent shares plunging again. But Paychex (NAS: PAYX) and Automatic Data Processing (NAS: ADP) have shown that a bad job market doesn't have to translate to weaker results.
With Lawson Software, which is Kenexa's main rival, having gone private after Carl Icahn urged the company to sell itself, Kenexa is in a good position to take market share away from its competition. Until the U.S. economy cooperates, though, it's going to be nearly impossible for Kenexa to get promoted to perfect-stock status.
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 Yum! Brands.Motley Fool newsletter serviceshave recommended buying shares of Yum! Brands, Paychex, ADP, andUnilever. We Fools don't 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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