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 Stamps.com (NAS: STMP) 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 Stamps.com.
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%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With a score of 5, Stamps.com delivers investors halfway to perfection. The Internet-based postage company may seem almost oxymoronic, but it actually has sported reasonable financials despite a very high valuation.
The past decade has been a tough time for businesses that rely on the mail. With the Internet making electronic communication cheaper and more efficient, stocks like postage-meter specialist Pitney Bowes (NYS: PBI) have declined steadily since 2001. And between email on one hand and competition from UPS (NYS: UPS) and FedEx (NYS: FDX) on the other, the Postal Service has run into serious economic trouble, prompting talk of a possible bailout to save it from insolvency.
But trouble at the post office hasn't held Stamps.com back. In July, the company announced a 26% jump in revenue, with earnings per share almost doubling analyst targets. Then last week, Stamps.com followed up with another earnings beat -- the 11th in a row for the company -- and set records for year-over-year core PC postage growth and various customer metrics, including total paid customers and revenue per customer. The report sent the stock up more than 25%, representing just the latest example of how this company has defied skeptics with its strong results.
The main concern for shareholders should be just how quickly the stock has run up lately. With the stock now fetching double what it did in mid-August, Stamps.com may have come too far too fast. Unless it pulls back, Stamps.com isn't likely to become a perfect stock at current valuations.
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 FedEx and United Parcel Service. Motley Fool newsletter services have recommended buying shares of FedEx. 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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