Has Research In Motion Become the Perfect Stock?
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 Research In Motion 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 Research In Motion.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-year annual revenue growth > 15% | 29% | Pass |
1-year revenue growth > 12% | (25.2%) | Fail | |
Margins | Gross margin > 35% | 29.4% | Fail |
Net margin > 15% | (4.1%) | Fail | |
Balance sheet | Debt to equity < 50% | 0% | Pass |
Current ratio > 1.3 | 2.2 | Pass | |
Opportunities | Return on equity > 15% | (6.4%) | Fail |
Valuation | Normalized P/E < 20 | 69.39 | Fail |
Dividends | Current yield > 2% | 0% | Fail |
5-year dividend growth > 10% | 0% | Fail | |
Total score | 3 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Research In Motion last year, the company plunged four points, bringing its total two-year loss to five points. A big revenue contraction, drops in margins, and negative earnings on a GAAP basis contributed to the drop, and the stock has fallen about 35% over the past year, albeit having recovered more recently from even more severe losses.
Back in the day, Research In Motion's BlackBerry mobile phones were state of the art and the device of choice for business consumers. Because of security concerns, businesses were slow to adopt rival mobile platforms from Google and Apple despite their unquestioned popularity away from the office. Gradually, though, those security concerns have been met, bridging RIM's last stretch of moat against its competitors.
As a result, RIM now sports just a 1.6% U.S. market share, down sharply from 8.5% a year ago. Worldwide, the company is fighting with perennial challenger Microsoft , which has also struggled in the smartphone industry, to hold onto the No. 3 spot in market share. Yet with Google's Android running 75% of all smartphones and Apple taking 15%, whether RIM can sustain a global market share that just fell below 5% isn't all that important to the big picture.
Most analysts believe that RIM's coming BlackBerry 10 operating system is its best -- and probably last -- chance at a full-blown recovery. Unless it succeeds, customers, wireless carriers, and developers are all likely to stop supporting RIM's products as they lose confidence in the company's ability to deliver what consumers want. Investors have bid up shares as they hope for a recovery, but neither its chances nor those of Nokia -- which is largely in the same boat as RIM in terms of its falling cell phone market share -- look all that promising right now.
For RIM to survive and recover, it needs to get customers interested in its products again. If BlackBerry 10 can't do the trick, RIM doesn't really have many arrows left in its quiver as a follow-up.
Keep searching
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.
Like Research in Motion, Nokia has been struggling in a world of Apple and Android smartphone dominance. However, unlike RIM with its proprietary operating system, Nokia has banked its future on its next generation of Windows smartphones. We've created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide if Nokia is a buy or a sell right now. To get started, simply click here now.
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The article Has Research In Motion Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger owns shares of Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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.
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