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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 General Electric (NYSE: GE ) 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 GE.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.9%||fail|
|1-Year Revenue Growth > 12%||(6.3%)||fail|
|Margins||Gross Margin > 35%||34.3%||fail|
|Net Margin > 15%||6.7%||fail|
|Balance Sheet||Debt to Equity < 50%||428.3%||fail|
|Current Ratio > 1.3||3.05||pass|
|Opportunities||Return on Equity > 15%||10.1%||fail|
|Valuation||Normalized P/E < 20||21.04||fail|
|Dividends||Current Yield > 2%||2.9%||pass|
|5-Year Dividend Growth > 10%||(13.8%)||fail|
|Total Score||2 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 2, GE isn't lighting up the night anymore. Although being a major conglomerate served the company well for decades, GE has suffered a lot of pain outside the core industrial business that it's best known for.
GE has its hand in a number of businesses. The company was once primarily known for its household presence in lightbulbs and appliances, where it still competes with Whirlpool (NYSE: WHR ) ; its consumer segment now makes up only 6% of revenue.
Much larger are its technology and energy businesses. In energy, the conglomerate is at the forefront of wind turbine production, going up against Siemens (NYSE: SI ) . The technology segment makes medical devices as well as aviation and transportation products, with Koninklijke Philips (NYSE: PHG ) among the larger of its many competitors. In addition, GE currently owns a controlling stake in the media company NBC Universal, although it's on track to sell a 51% interest in NBC Universal to Comcast (Nasdaq: CMCSA ) .
What got GE into trouble, though, was its finance unit. In the years running up to the financial crisis, the segment produced huge profits for GE. But losses from the unit forced GE to slash its dividend and seek help from Berkshire Hathaway (NYSE: BRK-B ) in an emergency effort to raise capital. Those measures were enough to allow the company to survive, but they highlight the dangers of being a jack-of-all-trades in business.
GE has a strong brand and has maintained an innovative style. But it's unclear whether the company will fully recover from the financial crisis, especially if it de-emphasizes its formerly lucrative finance unit. Until GE comes up with answers, it's hard to consider it anything close to a perfect stock.
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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