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 MasterCard (NYS: MA) 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 MasterCard.
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%
7 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at MasterCard last year, the company's seven-point score has held steady, marking the third straight year with no score change. Yet the stock has done quite well, rising about 45% over the past year.
MasterCard has long been a big player in the credit- and debit-card industry, duking it out with leader Visa (NYS: V) . In fact, the two have been so strong in the space that they faced a huge price-fixing dispute from merchants over the fees the card networks charged on card transactions. MasterCard and Visa have offered a multibillion-dollar settlement, but consumers could have to pay surcharges from stores that pass on costs to their customers.
Moreover, competition is coming up fast in the transaction-based industry, especially in the electronic and mobile payments realms. Recently, Discover Financial (NYS: DFS) teamed up with eBay's (NAS: EBAY) PayPal to allow shoppers to use their PayPal accounts to buy things at any merchant location that accepts Discover. Moreover, retailers are trying to create their own networks, with more than a dozen major chains linking together to form the Merchant Customer Exchange.
In its most recent quarter, MasterCard continued its winning ways. With nice gains in sales and profits, the company is outperforming Discover and American Express (NYS: AXP) and keeping up with Visa.
For MasterCard to improve, it needs to think about paying a more substantial dividend. If it does that and continues to boost its revenue, MasterCard could make big strides toward 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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The article Has MasterCard Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Visa and eBay, as well as writing a covered strangle on American Express. 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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