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 Ebix (NAS: EBIX) 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 Ebix.
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 9
Source: S&P Capital IQ. NM = not meaningful; Ebix paid its first dividend in Nov. 2011. Total score = number of passes.
Since we looked at Ebix last year, the company has kept its eight-point score, but it has started down the road toward getting its last two missing points by initiating a dividend.
Cloud computing has been extremely popular in recent years, and most companies tied into the cloud industry fetch big premiums. But Ebix, which provides insurance companies with Internet-based software that helps them manage their businesses, trades at a perfectly reasonable multiple to earnings.
But Ebix has seen potential competitors become more prominent. Although the insurance segment makes up only part of Computer Sciences' (NYS: CSC) overall business, it has a larger base of resources than Ebix to capture growth if it finds lucrative opportunities. Meanwhile, Guidewire (NYS: GWRE) went public earlier this year and has seen its share price soar, holding up reasonably well even in the recent market swoon. From its niche in providing property and casualty insurers with underwriting and policy administration systems, Guidewire could pose a long-term threat to Ebix -- even though Guidewire's valuation looks much more expensive right now.
To compete, Ebix bought PlanetSoft for $40 million earlier this week. The acquisition should help it by adding additional services to its life and annuity exchanges, and perhaps more important, PlanetSoft's customer list includes industry leaders Manulife Financial (NYS: MFC) and Sun Life Financial (NYS: SLF) , potentially leading to stronger customer relationships for Ebix.
For Ebix to keep improving, it only needs to sustain its current growth while raising its dividend. Despite an up-and-down share price, the company looks poised for perfection in the near future.
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 Ebix. Motley Fool newsletter services have recommended buying shares of Ebix. 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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