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 Aruba Networks (NAS: ARUN) 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 Aruba Networks.
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; Aruba Networks had negative earnings for the period. Total score = number of passes.
With a score of 5, Aruba Networks looks like it's connecting reasonably well. But concerns about the wireless networking sector have hit Aruba's stock particularly hard recently.
Aruba provides secure computer networks at the enterprise level. The company is well-known for its security management systems as well as a complete set of networking features. With all the growth in the sector in recent years, the stock has caught fire since 2009.
The big rise in Aruba shares came to an abrupt halt earlier this year. Despite a May quarterly report that saw adjusted earnings double and revenue rise more than 50%, it wasn't enough to make growth-hungry investors happy with the results. That's not surprising, given how the company's valuation was very rich compared to competitors Motorola Solutions (NYS: MSI) and Hewlett-Packard (NYS: HPQ) .
Now, the potential for a double-dip recession has investors running away from networking stocks. On Thursday, Aruba, Acme Packet (NAS: APKT) , and Riverbed (NAS: RVBD) all dropped 15% or more as fears that IT departments will have to cut spending drastically in response to an economic slowdown rippled through the sector.
After seeing amazing growth, Aruba now faces a test: whether it can survive a slowing economy and still thrive. Until it can demonstrate that ability, Aruba won't become 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.
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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of Riverbed Technology and Acme Packet. 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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