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 Quality Systems 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 Quality Systems.
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%
9 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Quality Systems last year, the company gained a point, with only a 0.2 percentage point shortfall in net margin separating it from perfection this year. But the stock has been anything but perfect, with a more than 50% drop in the past year.
Quality Systems is seeking to become a bigger player in the electronic health-records industry. With calls under health-care reform laws to bolster portability of medical records, the company seemed to be in exactly the right place at the right time.
But Quality Systems has had a truly terrible 2012. Sales growth has decelerated, and the company has consistently missed quarterly earnings estimates throughout the year. It also suspended future guidance, worrying investors that the worst could be yet to come. Given that prospective buyers are having to wait for regulations covering health-record requirements, there's likely pent-up demand, but it's uncertain when it will get released.
Quality Systems hasn't been the only player in the space to suffer. Allscripts Healthcare Solutions has seen similar stock-price losses throughout the year, and it was only when the company hired an investment-bank advisor to explore strategic alternatives such as putting itself up for sale that the stock bounced back. But competition from Cerner , which has benefited from the trend toward payment bundling for medical expense reimbursement, looms over Quality, as does the presence of General Electric and its much larger health-care segment.
For Quality Systems to improve, it needs to reinvigorate growth. But with the reduction in price, the stock is finally looking like a reasonable value proposition, and that could be the last obstacle between it and perfection for investors looking to get in now.
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 Quality Systems 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 General Electric. Motley Fool newsletter services recommend Quality Systems. 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.