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 ZAGG (NAS: ZAGG) 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 ZAGG.
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 ZAGG last year, the company has dropped a point. Although its stellar growth has continued, the company has taken on significant debt in the past year, yet has still seen falling margins and returns on equity nevertheless.
Smartphones and other mobile devices have only gotten more popular in the past year, and ZAGG's products help people protect their big purchases from damage as well as adding useful functions for their use. In particular, its attachable keyboard complements Apple's (NAS: AAPL) iPad series quite well, and as Apple's product cycles continue to produce strong results, ZAGG is in position to capitalize each time a hot new device comes out.
In its most recent quarter, ZAGG kept firing on all cylinders. Sales more than doubled thanks largely to the company's acquisition of iFrogz in mid-2011, but even with the acquisition boost, the figure came in above expectations. More important, AT&T (NYS: T) said that it would start stocking ZAGG's battery chargers and keyboard products in its wireless stores, adding another distribution outlet on top of ZAGG's existing relationship with Best Buy (NYS: BBY) .
For ZAGG to continue its path toward perfection, it needs to sustain its growth while looking for ways to get more profitable. Although iFrogz may help the company diversify its product line, it faces competition from Skullcandy (NAS: SKUL) and other suppliers in the headphone market. ZAGG will need continuing growth in the mobile device market in order to have a chance at becoming a perfect stock in the years 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 in this article. The Motley Fool owns shares of Skullcandy, Best Buy, and Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position on Apple, as well as writing naked calls on ZAGG. 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.