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 Fusion-io (NYSE: FIO ) 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 Fusion-io.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-year annual revenue growth > 15% | 333.1% | Pass |
| � | 1-year revenue growth > 12% | 47.8% | Pass |
Margins | Gross margin > 35% | 58% | Pass |
| � | Net margin > 15% | (0.3%) | Fail |
Balance sheet | Debt to equity < 50% | 0% | Pass |
| � | Current ratio > 1.3 | 7.24 | Pass |
Opportunities | Return on equity > 15% | (0.3%) | Fail |
Valuation | Normalized P/E < 20 | 156.53 | Fail |
Dividends | Current yield > 2% | 0% | Fail |
| � | 5-year dividend growth > 10% | 0% | Fail |
| � | � | � | � |
| � | Total score | � | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Fusion-io last year, the company gained a point as it established a nearly five-year track record of growth. But shares haven't been so lucky, losing nearly half their value over the past year.
Fusion-io has taken the data storage industry by storm. With its focus on flash memory and solid-state storage, Fusion-io is taking aim at old-style hard-disk drive makers, seeking to provide better speed and functionality to enterprise customers.
But one major problem that Fusion-io has is that its products are apparently too good. At the end of January, Fusion-io said that revenue for its fiscal third quarter would come in more than 40% below where analysts had expected, with the full-year 2013 shortfall amounting to as much as $100 million. The company said that timing of purchases from its two main customers, Facebook (NASDAQ: FB ) and Apple (NASDAQ: AAPL ) , would push back future sales. Facebook and Apple both rely heavily on Fusion-io, together accounting for half of Fusion-io's revenue, but if their data centers work so well that they won't need further orders from the flash-memory technology provider, then Apple's and Facebook's gain is Fusion-io's loss.
Fusion-io also faces competitive threats. Rather than accepting obsolescence, hard-drive maker Seagate Technology (NASDAQ: STX ) has been rumored to be looking at buying Fusion-io rival OCZ Technology (NASDAQ: OCZ ) , which is also a solid-state drive maker. The combination could force Fusion-io to find its own partner or else face a behemoth competitor that could potentially crush it with its industry relationships.
For Fusion-io to improve, it needs to take its revenue gains and convert them into profits. That's a tall order in a highly competitive market, but it's absolutely necessary if Fusion-io has aspirations to become a perfect stock.
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.
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