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 Alaska Communications (NAS: ALSK) 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 Alaska Communications.
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%
3 out of 8
Source: S&P Capital IQ. NM = not meaningful due to negative shareholder equity. Total score = number of passes.
Since we looked at Alaska Communications last year, the company has picked up a point, as the stock's valuation has dropped significantly. Unfortunately, most of that has come from a drop in the share price, which has sunk more than 60% in the past year.
Alaska Communications has attracted dividend investors for a long time. Just as fellow rural telecom Frontier Communications (NAS: FTR) has turned its core service into big cash distributions to shareholders, Alaska Communications has given a big share of its cash back to investors over the years. But a year ago, the company slashed its dividend by more than 75% in the face of earnings losses, weak free cash flow, and increased competition.
In particular, Alaska Communications has seen the competitive threat develop over the years. AT&T's (NYS: T) purchase of privately held Dobson Communications in 2007 marked the first incursion from the lower 48 on Alaska's turf, and more recently, Verizon (NYS: VZ) has made moves to come into the state as well.
But Alaska Communications has responded by joining with rival General Communication to form a joint venture called the Alaska Wireless Network. The goal is for the two companies to create coverage of 95% of the state, with each party committing to breakup fees if a major telecom company comes in to buy one of them out.
For Alaska Communications to succeed, it will need its rollout of the iPhone 4S to go well enough to justify the subsidies it effectively pays to Apple (NAS: AAPL) , and presumably to get itself upgraded to the iPhone 5 as well. Even so, Alaska Communications will struggle to get itself much closer to perfection in the near term.
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.
Even after big dividend cuts, both Alaska Communications and Frontier Communications still have attractive yields. Yet with Frontier, every investor has to understand that even the company's lower dividend may not be sustainable. Will the company's business strategy finally bear fruit, or are investors destined for another disappointing dividend cut? In this premium research report on Frontier Communications, we walk you through all of the key opportunities and threats facing the company. Better yet, you'll receive a full year of updates to boot. Click here to learn more.
Click here to add Alaska Communications to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Has Alaska Communications Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.