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 Harley-Davidson (NYSE: HOG ) 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 Harley-Davidson.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3%)||fail|
|1-Year Revenue Growth > 12%||(15.7%)||fail|
|Margins||Gross Margin > 35%||31.8%||fail|
|Net Margin > 15%||(1.9%)||fail|
|Balance Sheet||Debt to Equity < 50%||306.2%||fail|
|Current Ratio > 1.3||1.93||pass|
|Opportunities||Return on Equity > 15%||5.3%||fail|
|Valuation||Normalized P/E < 20||27.05||fail|
|Dividends||Current Yield > 2%||1.2%||fail|
|5-Year Dividend Growth > 10%||(4.7%)||fail|
|Total Score||1 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just a single point, Harley-Davidson is about as far from perfect as you can get. Given the challenges that the company is facing, though, that's not terribly surprising.
A few years back, many investors believed that the aging baby-boom generation would help boost Harley's prospects as they retired and had more leisure time to pursue their dream hobbies. In response, Harley expanded its production capacity at what proved to be exactly the wrong time, as the financial crisis took a big bite out of new retirees' savings. That had a big impact on leisure vehicles of all kinds; ATV maker Polaris Industries (NYSE: PII ) and RV trailer company Winnebago (NYSE: WGO ) saw sales drop precipitously during the recession.
Now, the company is trying to cut costs and restructure its business to take advantage of its hugely popular brand. But with its core demographic aging and younger riders looking to competitors Honda (NYSE: HMC ) and Kawasaki for their sportier bikes, Harley needs to do a lot more to connect with a new generation of riders. And with a heavy debt load, it needs to act quickly, or else Harley might find itself riding off into the sunset.
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.
Want to own the perfect stock? Click here to read our special report, 5 Stocks the Motley Fool Owns -- And You Should Too.