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 8x8 (NAS: EGHT) 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 8x8.
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 8x8 last year, the company has seen its score jump by two points. An uptick in revenue growth and better net margins gave the company its boost, even though the stock price is down a bit over the past year.
The voice-over-Internet business continues to evolve, and surprisingly, the competition for the low end of this business has been fierce. With Vonage (NYS: VG) and magicJack VocalTec (NAS: CALL) fighting it out with their low-cost unlimited phone service, a race-to-the-bottom price war could end up being devastating to both companies.
But 8x8 distinguishes itself by catering to business customers. With businesses used to paying higher rates for services than residential customers, 8x8 has the chance to post much better margins, albeit not generally anywhere near as high as its current figure, which reflects a big one-time tax benefit.
So far, that model has worked well. Last October, the company acquired cloud-based call center Contactual, which added General Electric (NYS: GE) and Jamba (NAS: JMBA) to 8x8's customer base.
Still, 8x8 faces competition from big tech companies with an appetite to expand their service lines. 8x8 may have the inside track, but it'll have to keep running to maintain its lead. For 8x8 to improve, continuing growth and better profitability need to be its key goals for the years ahead.
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. 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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