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 Jive Software (NAS: JIVE) 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 Jive Software.
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 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes. *3.25-year growth rate.
With five points, Jive Software puts in a respectable performance. The enterprise software company has been public for less than a year, but already it's making a big impression in the highly competitive industry.
Jive has sought to bring social media trends to the business world by making it easier for employees within companies to collaborate on projects or tasks. Although the recent Facebook (NAS: FB) IPO fiasco has called the business models of socially based companies into question, Jive is seeking to follow the same path as LinkedIn (NYS: LNKD) by relying not on fickle consumers but rather on more reliable corporate customers that can put real value on the products Jive provides.
What Jive lacks that Facebook and LinkedIn both have, however, is profitability. That opens the door for rampant speculation in the space, as investors try to ferret out the next big stock in the space before any of the companies have proven themselves. BroadVision (NAS: BVSN) , for instance, soared from $10 per share to $50 earlier this year as investors looked longingly at the company's Clearvale product to help companies link up with Facebook and Twitter. Yet those gains disappeared as reality asserted itself in BroadVision's sales weakness. By contrast, at least Jive has legitimate revenue growth, with a solid set of customers using its products.
On Friday, Jive's shares closed up more than 5% after reports that Microsoft (NAS: MSFT) plans to buy privately held Yammer to boost its business social-media presence. If it goes through, the Microsoft purchase could help set a price for Jive, and might lead one of Microsoft's competitors to step up with a bid of its own.
Nevertheless, for Jive to improve, it needs to concentrate on becoming profitable. Given that the company's expenses have grown at a faster pace than its sales lately, that's a tall order -- but one that could bring shareholders plenty of upside if Jive can pull it off.
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 Microsoft, Facebook, and LinkedIn. Motley Fool newsletter services have recommended buying shares of Microsoft and LinkedIn, as well as creating a bull call spread position in Microsoft. 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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