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 AutoNavi (NAS: AMAP) 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 AutoNavi.
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%
8 out of 10
Source: S&P Capital IQ. * 3.75-year growth rate. Total score = number of passes.
With eight points, AutoNavi looks like it's guiding investors to perfection. But the Chinese mapping specialist's shares have been going in the wrong direction for a while.
AutoNavi gives investors exposure to the online media space in China, as the company has a map database covering millions of miles of roadways and even more points of interest along the way. The company closely resembles Garmin (NAS: GRMN) but lacks the hardware devices that Garmin offers.
When it came public in mid-2010, AutoNavi faced a much less crowded space among Chinese IPOs. But with more promising IPOs from companies including Renren (NYS: RENN) , Youku.com (NYS: YOKU) , and Tudou (NAS: TUDO) , it's been harder for the mapping company to hold investors' interest. Moreover, with investors concerned about the legitimacy of small-cap Chinese stocks, even reputable companies have seen their shares thrown out with the bathwater.
In its most recent quarter, AutoNavi disappointed investors, leading to an analyst downgrade of the stock. Even with the company's attractive growth, the shares are fairly expensive compared with some of its beaten-down compatriots. Just as Google and other competitors eventually bit into Garmin's niche, so too can investors expect Baidu (NAS: BIDU) or Sina (NAS: SINA) to eventually flex their muscles and start a turf war in China.
With no apparent prospects to start paying a dividend, AutoNavi has likely reached the pinnacle of its approach toward perfection. Unless the company can find ways to keep its offerings fresh and avoid the struggles that Garmin has faced, AutoNavi is more likely to see its score head south in the months 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.
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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 Google. Motley Fool newsletter services have recommended buying shares of Google, Baidu, and Sina. 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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