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 Focus Media (Nasdaq: FMCN) 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 Focus Media.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 309.3% Pass
  1-Year Revenue Growth > 12% 53.5% Pass
Margins Gross Margin > 35% 63.5% Pass
  Net Margin > 15% 25.4% Pass
Balance Sheet Debt to Equity < 50% 13.0% Pass
  Current Ratio > 1.3 3.11 Pass
Opportunities Return on Equity > 15% 15.8% Pass
Valuation Normalized P/E < 20 24.92 Fail
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Focus Media last year, the stock has picked up two more points. Rising returns on equity and huge revenue growth in the past year boosted its score, and its earnings multiple actually contracted substantially as well.

Focus Media is trying to cash in on the boom in the Chinese middle class. With billboards, posters in elevators, and TV displays, Focus Media delivers advertising to wherever it can find consumers hungry for new product ideas. That's been a lucrative area in which several companies have tried to play a role. VisionChina Media (Nasdaq: VISN) has found some success using mass-transit locations for its advertising, while AirMedia Group (Nasdaq: AMCN) focuses on airports for its electronic displays. But neither VisionChina nor AirMedia has done what Focus Media has -- namely, become profitable.

But last year, Focus Media attracted the attention of Muddy Waters, which alleged overstated financials and even suggested that the company was using fraudulent practices. Given how many small Chinese companies have never recovered from similar allegations, the plunge in the stock seemed justified. Yet Focus Media has fought back every step of the way, with some recent insider buying trying to bolster the bull case for the stock.

The best news for those looking for Focus Media to reach perfection came in January, when the company announced it would start paying a dividend this year. Nothing rebuts allegations of bad accounting practices better than cold, hard cash, and the shares have surged ever since.

Given the big growth pushes that Chinese giants Baidu (Nasdaq: BIDU) and SINA (Nasdaq: SINA) are making in the Internet space, adding on the real-world marketing expertise that Focus Media offers could be a smart move for those companies if they seek a buyout candidate. If Focus Media can truly show shareholders the money, a perfect 10 could be just a few years away if the company stays independent.

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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