September 24, 2010
By Dan Caplinger, Motley Fool
Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if TASER (Nasdaq: TASR) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
•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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
•Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
•Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
•Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
•Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 TASER.
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%
3 out of 10
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; TASER has a net loss over the past 12 months. Total score = number of passes.
A score of 3 isn't even good, let alone perfect. But TASER has seen a once-promising business turn into disappointment, as big profits in 2007 turned out to be a one-time phenomenon. The failure is particularly disappointing in light of how other self-defense-related businesses have performed financially. Olin Corp. (NYSE: OLN) has seen its Winchester ammunition business soar, quadrupling its profits since 2006. Even as Sturm Ruger (NYSE: RGR) and Smith & Wesson (Nasdaq: SWHC) gained investor attention and boosted share prices in the past year and a half with their sales of more aggressive self-defense alternatives to stun guns, TASER couldn't generate profits, and shares fell steadily .
What TASER has going for it is a clean balance sheet and decent gross margins. But until the company can figure out how to be profitable, it doesn't look like a good bet for investors.
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.
WELCOME to TRUTH ... not TASERS
Friday, September 24, 2010
September 24, 2010