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 Alaska Communications (NAS: ALSK) 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 Alaska Communications.
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%
2 out of 8
Source: S&P Capital IQ. NM = not meaningful due to negative shareholder equity. Total score = number of passes.
With only two points, Alaska Communications isn't close to being a perfect stock. But you might have trouble telling that to dividend investors, who couldn't be happier about the stock's huge double-digit dividend yield. Alaska Communications has a lot in common with peers to the south. Like AT&T (NYS: T) and Verizon (NYS: VZ) , Alaska Communications has a stable business with plenty of cash flow coming in from subscribers. Moreover, there's no bigger moat against potential competition than having a whole other country between your business area and the lower 48.
But some things are different. As recently as three years ago, Alaska Communications was spending huge amounts of money to expand fixed-line service. That stands in marked contrast to the big money that AT&T, Verizon, and Sprint Nextel (NYS: S) have spent focusing on building wireless networks. Moreover, like fellow rural-serving telecoms Frontier Communications (NYS: FTR) and Windstream (NAS: WIN) , Alaska Communications doesn't have the rock-solid balance sheet you'd like to see.
Recently, Kapitall suggested that IBM (NYS: IBM) might want to buy up the Alaskan telecom company. As part of a plan to grow earnings substantially in the next few years, IBM could use the cash flow that Alaska Communications would provide.
As is often the case with high-yield stocks, some investors are concerned about whether the company's payout is sustainable. Fellow Fool Brian Stoffel looked at the company recently and discovered a big deferred tax benefit that's responsible for boosting free cash flow enough to support the dividend. Still, the payout has been stable for years, so it's uncertain what catalyst might finally provoke a cut.
With lackluster growth, substantial debt, and negative shareholder equity, Alaska Communications has plenty of work to do to become a perfect stock. For now, shareholders will have to be content with a great dividend.
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 Alaska Communications 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 IBM. Motley Fool newsletter services have recommended buying shares of AT&T. 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.