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 American Express (NYS: AXP) 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 American Express.
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%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at American Express last year, the card company has kept the same score of six. But AmEx certainly hasn't been sitting still over the past 12 months.
AmEx is obviously best known for its card network, which competes against MasterCard (NYS: MA) and Visa (NYS: V) . But lately, most of the attention in the industry has focused on creating mobile payment systems using smartphones. With research suggesting that global transaction volume using near-field communications could reach $670 billion by 2015, AmEx and its competitors can't just sit idly by and wait to watch their former business models become obsolete.
How that will shake out remains to be seen. AT&T (NYS: T) and Verizon (NYS: VZ) support the Isis mobile payment network, which AmEx, Visa, MasterCard, and Discover Financial (NYS: DFS) are already on board. But Google recently released its Google Wallet, and although it's limited now to MasterCards from Citigroup (NYS: C) , expansion seems inevitable.
Unfortunately for AmEx, it appears that the credit card crisis may not be entirely over. Delinquencies have risen at several U.S. financial institutions lately, underscoring the credit risk that AmEx takes on with its customers.
For AmEx to keep improving, it needs to move forward in the mobile payments space, ensuring that it doesn't get left behind. With its brand recognition, however, AmEx is in a good position to keep marching toward perfection in the years ahead.
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 Citigroup, Google, and MasterCard. Motley Fool newsletter services have recommended buying shares of 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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