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 Oracle (NAS: ORCL) 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 Oracle.
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 9
Source: S&P Capital IQ. NM = not meaningful; Oracle started paying a dividend in April 2009. Total score = number of passes.
With seven points, Oracle is within a stone's throw of perfection. The software giant has expanded its reach in recent ye ars, and unlike some of its peers, it seems to be hitting on all cylinders right now.
Oracle has long been a leader in database and enterprise software. But just as competitor IBM (NYS: IBM) pushed itself beyond its hardware base to provide IT consulting services, so too did Oracle's acquisition of Sun Microsystems give Oracle a broader perspective from which to build out a more complete line of products and services.
So far, Oracle seems to be winning that fight, with much stronger growth than Big Blue over the past 12 months in every region of the world. Having poached former Hewlett-Packard (NYS: HPQ) CEO Mark Hurd from one of its biggest rivals, Oracle is in a better position than ever to squash challenges from both HP and fellow PC maker Dell (NAS: DELL) to build up their presence in the more lucrative IT business segment.
Moreover, the company is still trying to expand. Late last month, Oracle said it would acquire RightNow Technologies (NAS: RNOW) to back up its presence in cloud computing. By doing so, it mounts challenges against salesforce.com (NYS: CRM) and TIBCO Software (NAS: TIBX) while keeping its more direct competitors at bay in thwarting their own cloud-expansion efforts.
For Oracle to continue improving, it needs to continue expanding its relatively new dividend payments to shareholders. Given positive earnings and sales growth in its most recent quarter, it certainly appears that Oracle has plenty of room to boost its payout. If it gets some help from an economic recovery, then the sky could be the limit for Oracle.
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 contributorDan Caplingerdoesn't own shares of the companies mentioned. The Motley Fool owns shares of Oracle and IBM.Motley Fool newsletter serviceshave recommended buying shares of TIBCO Software, Dell, and salesforce.com. A separate service has recommended shorting salesforce.com. 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 adisclosure policy.
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