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 Western Union (NYS: WU) 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 Western Union.
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%
6 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, Western Union is delivering the results shareholders want. The cash specialist has grown alongside the rise of the global economy.
In a financial industry dominated by banks, Western Union serves those who choose another path. By allowing people to transfer money around the world, the company helps everyone from immigrants sending money back to their home countries to those who just need quick cash from friends or family.
But Western Union faces increasing competition. Prepaid cards from up-and-comers Netspend Holdings (NAS: NTSP) and Green Dot (NYS: GDOT) make it easier for bankless consumers to keep cash on hand. Moreover, Global Payments (NYS: GPN) has posted much faster growth in recent years even without the high leverage that Western Union uses in its business.
Recently, the company dug into its own pockets to buy out the global business payments unit of Travelex Holdings for about $975 million. By expanding beyond its consumer-oriented business to tap into to business-to-business transactions, the move should help Western Union diversify its operations.
For now, results still look good as earnings keep pouring in from Western Union's consumer segment. Shareholders need to watch out, though, as Visa (NYS: V) and eBay's (NAS: EBAY) PayPal expand to cover Western Union's traditional customer base. Unless Western Union can answer competitive pressures, it won't keep marching toward perfection.
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 Western Union, eBay, and Visa, as well as writing a covered strangle position on Western Union. 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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