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 eBay (NAS: EBAY) 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 eBay.
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 only four points, eBay isn't bidding high to become the perfect stock. The company that pioneered online auctions has struggled to keep its high-flying status, but things may finally be looking up.
eBay's namesake auction site introduced users to the concept of bidding for bargains. Although the company successfully fought off competing auction products from Yahoo! (NAS: YHOO) and Amazon.com (NAS: AMZN) , eBay has had a harder time meeting the challenge from Craigslist and other free listing websites. Fee increases over the years haven't made its heaviest users very happy.
Moreover, the company has made some strategic missteps. Its biggest disappointment has to be selling off a big piece of its stake in Skype for far less than what Microsoft (NAS: MSFT) paid for the company earlier this year.
But eBay's PayPal unit has saved the company and continues to be the most progressive part of the business. With more than 100 million registered accounts, PayPal is taking on big payment networks Visa (NYS: V) and MasterCard (NYS: MA) with point-of-sale purchase options coming to retailers this year and next.
eBay doesn't have clear sailing even in its payment niche. Like Latin American peer MercadoLibre (NAS: MELI) , eBay has to deal with the fact that shoppers have a huge number of choices about where to spend their money. If PayPal can stand up to its much larger rivals in payments, it may give eBay its best chance to 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 Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Microsoft and Yahoo!. Motley Fool newsletter services have recommended buying shares of Yahoo!, Visa, Amazon.com, MercadoLibre, and Microsoft, as well as creating a bull call spread position in Microsoft. 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 a disclosure policy.
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