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 Baidu.com (NAS: BIDU) 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 Baidu.
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%
7 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
When we looked at Baidu last year, it had an identical score of 7, so it hasn't gotten any closer to perfection. China's Internet-search giant has continued its strong growth trajectory, but it still carries a lofty price to match and isn't rewarding shareholders with dividends.
Baidu has long been top dog in the Internet space in China, and it now controls more than three-quarters of search queries in the world's most populous nation. But it's found itself in the unfamiliar position of having to fight for attention in the past year, as a lot of up-and-coming Chinese companies have made their names known through IPOs.
That hasn't stopped Baidu from asserting its dominance. The company has made forays into video, challenging the niche that Youku.com (NYS: YOKU) and Tudou (NAS: TUDO) have carved out. It's also trying to answer Sina (NAS: SINA) and its Weibo microblogging feature.
Things haven't gone perfectly for the company. A recent expose by Chinese state-owned television alleged that some search-result clicks are fraudulent and that advertisers aren't getting what they're paying for. But just as Google (NAS: GOOG) answered similar allegations in the U.S., Baidu needs to fight back in order to maintain its competitive position.
Even with a 50% gain in the stock's price in the past year, Baidu's growth has brought its earnings multiple down since late 2010. Baidu is pricey, but if it can continue to grow, then it might eventually get to the point where it reaches 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 the best investments from the rest.
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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Sina, Google, and Baidu. 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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