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 MasterCard (NYS: MA) 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 MasterCard.
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: S&P Capital IQ. Total score = number of passes.
When we looked at MasterCard last year, it weighed in with the same seven-point score. The card giant has navigated a tricky regulatory environment very well, but the challenges are far from over.
As a huge payment processor that's second only to Visa (NYS: V) , MasterCard has an enviable position in the global financial system. MasterCard makes money every time someone uses a credit or debit card in its network, yet takes no credit risk whatsoever. Moreover, as long as the company can convince customers to use plastic instead of cash, MasterCard can keep growing even if overall economic activity stagnates.
More importantly, MasterCard knows that the future goes beyond cards. With partnerships with Google and Citigroup (NYS: C) , MasterCard has moved confidently into the smartphone-based electronic wallet area. But the company still faces plenty of competition. eBay's (NAS: EBAY) PayPal will fight to retain its lead in online payments, American Express (NYS: AXP) has introduced a rival electronic wallet, and telcos AT&T (NYS: T) and Verizon (NYS: VZ) are also ready to try to take command of the emerging niche through their ISIS network.
Meanwhile, the backlash against credit and debit cards continues as debit card fee limitations take effect. Some analysts fear that the fallout could reduce card use and hurt revenues for MasterCard and its peers. But as long as money has to move somehow, MasterCard seems well poised to keep its fingers in the pie.
With an insignificant dividend and a fairly pricey valuation, MasterCard falls short of perfection. But if it can keep making the right moves, the company could easily keep improving in the years to come.
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.
Click hereto add MasterCard to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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."
At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Citigroup, MasterCard, and Google. Motley Fool newsletter services have recommended buying shares of Google, AT&T, eBay, and Visa, 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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.