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 VirnetX 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.
Moneymaking 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, and with the understanding that these factors don't always work well with companies that don't have traditional business models, let's take a closer look at VirnetX.
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%
5 out of 8
Source: S&P Capital IQ. NM = not meaningful because of negative earnings and negligible revenue. Total score = number of passes.
Since we looked at VirnetX last year, the company has seen its score climb substantially, largely because of high percentage gains in revenue. Investors have also been optimistic about its prospects, as the stock has risen 50% over the past year.
VirnetX is a company that owns intellectual property related to keeping 4G LTE communications secure. Having obtained those patents from former parent SAIC seven years ago, VirnetX has spent much of its history in court trying to collect damages from tech companies that VirnetX claims infringed on its technology.
VirnetX has had considerable success in its legal efforts. In November, it won a $368 million jury award against Apple over allegations that Apple's FaceTime video-calling service infringed on its patents. With post-trial motions still ongoing, VirnetX hopes to get an injunction against Apple pending a possible appeal of the jury verdict.
Yet so far, VirnetX hasn't been able to generate much recurring royalty income from its past victories. As a result, investors will have to hope for similarly positive results in VirnetX cases against Cisco Systems , where VirnetX is targeting VPN routers and voice-over-Internet products, and Siemens .
For VirnetX to improve, it needs to keep winning its patent fights and exhaust its opponents' remedies for appeals and other delays. Until it reaches final resolutions of its cases, VirnetX will be a highly speculative play dependent on favorable rulings for its main profit potential.
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 VirnetX Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Cisco Systems and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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