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 Global Payments (NYS: GPN) 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 Global Payments.
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 10
Source: S&P Capital IQ. Total score = number of passes.
With seven points, Global Payments seems to be doing quite well. But the company got some bad news last week, and it's unclear what the long-term damage could be.
Global Payments is involved in an increasingly lucrative business: payment processing. As a go-between, Global Payments works with merchants to connect them with Visa (NYS: V) , MasterCard (NYS: MA) , and other credit card networks in order to facilitate payment transactions from their customers.
As consumers have increasingly turned to credit and debit cards to make payments, Global Payments has seen strong growth in revenue and earnings. The challenge, though, is that the rise of mobile payments will require Global Payments and its peers to adapt to a changing paradigm. Just as eBay's (NAS: EBAY) PayPal and a host of big banks are trying to establish standards and competitive advantages in developing mobile-payment systems, Global Payments will need to do what it can to keep up.
Last week, Global Payments found itself involved in an apparent security breach. A report in the Wall Street Journal said that 50,000 cardholders could have had certain information compromised, although details weren't available. With the rash of security problems over the past year involving game network Sony and banking giant Citigroup (NYS: C) , it's more important than ever for companies to establish strong security protocols to ensure the safety of their customers' information. That's why Visa dropped Global Payments from a registry of providers meeting data security requirements -- a move that could hurt the processor going forward.
For Global Payments to achieve perfection, it needs to make sure that any fallout from this security breach is minor. Then, all it will take is for the company to start thinking about rewarding shareholders through greater dividends, and Global Payments could start approaching that perfect 10 mark soon.
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.
Global Payments may not be the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click hereto add Global Payments to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Mastercard and Citigroup. Motley Fool newsletter services have recommended buying shares of eBay and Visa as well as writing puts on eBay. 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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.