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 Emerson Electric (NYSE: EMR ) 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 Emerson Electric.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.2%||Fail|
|1-Year Revenue Growth > 12%||10.3%||Fail|
|Margins||Gross Margin > 35%||39.4%||Pass|
|Net Margin > 15%||9.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||54.4%||Fail|
|Current Ratio > 1.3||1.39||Pass|
|Opportunities||Return on Equity > 15%||23.2%||Pass|
|Valuation||Normalized P/E < 20||17.47||Pass|
|Dividends||Current Yield > 2%||3.1%||Pass|
|5-Year Dividend Growth > 10%||9.1%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Emerson Electric last year, the company has maintained its five-point score. The stock, however, has languished behind the overall market even in a fairly good environment for utility stocks generally.
Emerson makes technology that helps companies cut back on their power usage and boost their energy efficiency. Emerson has a number of high-profile companies on its customer list, including Apple (Nasdaq: AAPL ) . It also won a contract from Quanta Services (NYSE: PWR ) to supply power inverters for a huge photovoltaic power generation facility in California. That project started generating power late last year for NRG Energy's (NYSE: NRG ) solar division, which is handling commercial operations alongside partner Eurus Energy America.
Emerson had a tough quarter late last year, though. Flooding in Thailand disrupted its supply chain, forcing it to delay production of various types of electronics. That sent net income down 23%, and earnings missed expectations. Moreover, now that General Electric (NYSE: GE ) has recovered from its finance-driven disaster during the financial crisis, it will be an increasingly tough competitor in the energy efficiency space.
Nevertheless, Emerson has a lot of promise, with a strong dividend yield and reasonable valuation. If energy prices stay high, then the services and products that Emerson provides will hold their value -- and the stock should rebound from its recent weakness.
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.
Emerson Electric may not be a perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Emerson Electric to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.