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, and then decide whether Ancestry.com (NAS: ACOM) 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 the 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 Ancestry.com.
What We Want to See
Pass or Fail?
Five-year annual revenue growth > 15%
One-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%
Five-year dividend growth > 10%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Ancestry.com earlier this year, the company has kept its six-point showing. Yet although the stock has managed to make a modest gain, it appears investors won't be able to hang on to their shares much longer.
Ancestry.com was one of the success stories of the IPO world in recent years. Having gone public in late 2009, the stock more than tripled by mid-2011, and unlike short-lived shooting star Groupon (NAS: GRPN) , Ancestry managed to hold on to most of those gains, enjoying the networking benefits that LinkedIn (NYS: LNKD) has used to hold its valuation. Strong revenue growth and big boosts in subscriber counts explained the surge.
But the company was starting to face some headwinds. With NBC Universal having canceled the family-tracking television showWho Do You Think You Are?, which Ancestry heavily sponsored, it wasn't clear how Ancestry would best get the word out to keep subscriber numbers climbing.
Perhaps in response, reports surfaced during the summer that the company was looking for a buyer, with Facebook (NAS: FB) and Google (NAS: GOOG) named among those potentially interested. In the end, though, private-equity company Permira agreed to buy Ancestry for $32 per share -- a thin 10% premium over Friday's closing price.
Ancestry will likely never get a chance to become a perfect stock, but it'll be interesting to see what happens to the company going forward. Given the need for private equity to have an exit strategy, you could easily see Ancestry among the land of public companies again in the years to come.
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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The article Has Ancestry.com 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 Ancestry.com, Facebook, Google, and LinkedIn, as well as calls on Facebook. Motley Fool newsletter services recommend Ancestry.com, Facebook, Google, and LinkedIn. 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.