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 Juniper Networks (NYS: JNPR) 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 Juniper 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%
4 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just four points, Juniper Networks hasn't been connecting well with shareholders lately. The entire networking sector has had problems, and it remains to be seen whether Juniper can take advantage to distinguish itself from its peers.
When it comes to networking, the elephant in the room is Cisco Systems (NAS: CSCO) . But in the past year, Cisco has proven that it's not invulnerable, as macroeconomic factors play a big role in hurting the networking giant's once-reliable revenue streams from state and local governments. That has opened the door to smaller players like Juniper, F5 Networks (NAS: FFIV) , and Riverbed Technology (NAS: RVBD) to make a run at some of Cisco's market share. Yet, at least recently, up-and-coming networking players haven't been able to meet the huge expectations investors have of them.
In particular, Juniper has tried to get past Cisco through innovation. For several years, Juniper has spent a much larger percentage of its revenue on research and development than either Cisco or Brocade Communications (NAS: BRCD) , but R&D spending has also crimped earnings. Moreover, Cisco has such a huge lead that Juniper may never be able to catch up.
Concerns about an economic slowdown have also weighed on the stock. AT&T (NYS: T) and Verizon (NYS: VZ) have said that they'll spend less on networking equipment than normal in the second half of 2011, which could hurt the entire sector. And with businesses generally spending less on tech infrastructure, Juniper doesn't have tailwinds from the economic environment.
Even after its big share price drop, Juniper still doesn't carry the bargain valuation you might expect. Until it can turnaround, Juniper isn't going to look like 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. The Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of AT&T, Riverbed Technology, and Cisco Systems, as well as writing puts on Riverbed Technology. 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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