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 Vringo (ASE: VRNG) 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 Vringo.
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%
1 out of 5
Source: S&P Capital IQ. NM = not meaningful due to negative earnings well in excess of revenue, negative shareholder equity, and a lack of revenue five years ago. Total score = number of passes.
Vringo only scores a single point, making it look far from perfect. But shareholders couldn't be more pleased with the stock, which has more than tripled in the past year.
Vringo has piggybacked on two big trends: smartphones and social media. Its Facetones app takes information provided by Facebook (NAS: FB) and produces "visual ringtones" that show users pictures of the people they're talking to during a phone call. Like Zynga (NAS: ZNGA) and Glu Mobile (NAS: GLUU) , Vringo is counting on the increasing popularity of mobile devices to boost its business. Shares got a big boost when Internet billionaire Mark Cuban announced a substantial stake in Vringo.
But with the company having made a couple of acquisitions to boost its portfolio of patents, most notably a $22 million purchase from Nokia (NYS: NOK) , Vringo has turned to the courtroom to try to make money. In a lawsuit against Google, Vringo wants about $700 million for past licensing fees and a similar amount to cover future royalties. With AOL having settled with Vringo, it's evident that these disputes aren't simply frivolous.
Many analysts now believe that Google or some other big player will simply buy out Vringo rather than engaging in protracted litigation. With a new lawsuit against Chinese telecom equipment maker ZTE, the list of possible candidates is only getting longer. Whoever acquires Vringo would potentially be able to use its patent portfolio against its rivals, turning the tables in the courtroom and possibly helping make the buyout pay for itself.
Amid all this activity, Vringo may well not last long enough as an independent entity to improve on our 10-point scale. With all the speculation over the shares, however, you can definitely expect plenty of volatility along the way.
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 Is Vringo the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Google and Facebook. Motley Fool newsletter services have recommended buying shares of Facebook and Google. 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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