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 Dover (NYSE: DOV ) 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 Dover.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.4%||Fail|
|1-Year Revenue Growth > 12%||19.7%||Pass|
|Margins||Gross Margin > 35%||38.4%||Pass|
|Net Margin > 15%||11.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||44.4%||Pass|
|Current Ratio > 1.3||2.75||Pass|
|Opportunities||Return on Equity > 15%||17.9%||Pass|
|Valuation||Normalized P/E < 20||16.85||Pass|
|Dividends||Current Yield > 2%||2.1%||Pass|
|5-Year Dividend Growth > 10%||10.7%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Dover last year, the company has seen its score rise two points. A slight drop in share prices boosted its yield and brought valuations down to more attractive levels, despite continuing growth in revenue, margins, and dividend payouts.
Dover is a low-profile company whose main claim to fame is its 56-year record of making annual dividend increases. With its primary business in engine-related components and other industrial products, the company has its hand in a wide variety of businesses. Last year, Dover closed on its purchase of NXP Semiconductors' (Nasdaq: NXPI ) Sound Solutions division, giving it broader exposure to the consumer electronics industry.
More recently, Dover bought Maag Group, a pump and filtration system company. The company sees the acquisition helping it boost its global presence, as Maag operates in markets worldwide, including Europe, the U.S., and China. With strengthening competition from Ingersoll-Rand (NYSE: IR ) and Cooper Industries, both of which have strong global businesses of their own, Dover's move to combine organic growth with smart acquisitions looks like the right move.
An interesting opportunity for Dover might lie in engine advances. With both Cummins (NYSE: CMI ) and Westport Innovations (Nasdaq: WPRT ) working on natural gas-powered engines, it's likely that the structure and engineering of these new engines will require different internal components. If Dover gets in on the ground floor by providing these components, it could benefit greatly if the technology takes off.
For Dover to keep improving, continued revenue growth should help immensely. As the company keeps increasing its dividend, yields should be able to stay above the 2% mark, keeping Dover close to perfection.
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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