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 Riverbed Technology (NAS: RVBD) 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 Riverbed Technology.
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%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Riverbed Technology last year, the company has kept its five-point score. Yet the stock has lost more than half its value in the past year as concerns arise about its future.
Riverbed finds itself in a promising area, with its emphasis on trying to optimize wide-area networks for maximum efficiency and productivity. With more data than ever flowing through the Internet, Riverbed's technology helps streamline both data itself and its transmission.
But lately, Riverbed hasn't been able to keep its high-growth pace, with recent slowdowns leaving the stock especially vulnerable given its high valuations. In particular, international sales haven't picked up as much as investors had hoped, with European economic woes weighing on Riverbed's success there.
Still, the company has a lot of promise. Its partnership with Akamai Technologies (NAS: AKAM) makes a lot of sense, as Akamai's acceleration technology is a fitting complement to Riverbed's optimization techniques. And while larger competitors Cisco Systems (NAS: CSCO) and Juniper Networks (NYS: JNPR) will continue to fight in the space, Riverbed's focus there gives it a competitive advantage versus the many distractions that Cisco and Juniper have to deal with across their much larger businesses.
One threat Riverbed does face could come from competitor F5 Networks (NAS: FFIV) . With its own WAN optimization offerings, F5 has put in good results recently, and with the entire industry looking to dethrone Cisco through niche offerings, F5 is encroaching on Riverbed's turf.
For Riverbed to improve, it will need to defend its turf vigorously. Anything short of that could make shareholders very unhappy with the results.
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. Motley Fool newsletter services have recommended buying shares of F5 Networks and Riverbed Technology. 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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