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 Visa (NYS: V) 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 Visa.
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%
8 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
When we looked at Visa last year, it only managed to rack up six points, so we've seen a big improvement from the company's 2010 showing. A cheaper valuation and a continuing rise in the company's dividend have helped the credit card giant get closer to perfection.
Visa is the undisputed leader in the credit card business. With more cards than MasterCard (NYS: MA) , American Express (NYS: AXP) , and Discover Financial (NYS: DFS) combined, Visa covers the globe and dealt with more than $3.3 trillion in payments during 2010.
But Visa continues to face threats from several directions. Caps on debit-card fees could threaten their growth, especially as banks like Bank of America (NYS: BAC) have already instituted separate monthly charges for those who use their debit cards.
The bigger concern is the growing battle to create an electronic wallet. Google (NAS: GOOG) initially partnered with MasterCard on its pay-by-smartphone service but ended up working with all the major card networks. But with rival networks as well as eBay's (NAS: EBAY) PayPal all fighting for supremacy in the area, Visa will have to act strongly to defend its turf.
For now, though, Visa has everything it needs to succeed. With strong sales growth, a clean balance sheet, and improving returns on equity, all investors would need is a higher dividend to judge Visa 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 contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Bank of America, MasterCard, and Google. Motley Fool newsletter services have recommended buying shares of eBay, Visa, and Google, as well as writing a covered strangle position in American Express. 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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