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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 Puda Coal (AMEX: PUDA ) 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 Puda Coal.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||51.7%||pass|
|1-Year Revenue Growth > 12%||34.9%||pass|
|Margins||Gross Margin > 35%||12.7%||fail|
|Net Margin > 15%||7.3%||fail|
|Balance Sheet||Debt to Equity < 50%||30.9%||pass|
|Current Ratio > 1.3||4.78||pass|
|Opportunities||Return on Equity > 15%||20%||pass|
|Valuation||Normalized P/E < 20||12.86||pass|
|Dividends||Current Yield > 2%||0%||fail|
|5-Year Dividend Growth > 10%||0%||fail|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Puda supplies metallurgical coking coal to China's steel industry. That fits in well with China's growth story, as steel production is a crucial part of the nation's overall strategy to improve its infrastructure.
Moreover, the area is a hot one right now. Mining company Rio Tinto (NYSE: RIO ) recently paired up with Aluminum Corp. of China (NYSE: ACH ) in a joint venture targeting coking coal and copper. U.S. coal producer Walter Energy (NYSE: WLT ) announced a takeover of Canada's Western Coal, adding to its strength in metallurgical coal.
Unlike many small Chinese stocks, Puda actually seems reasonably valued based on its fundamentals, even after the stock's big run this year. With projections of greater than 50% growth in earnings for 2011, the stock trades at less than eight times forward earnings estimates.
The primary danger for Puda is a potential economic slowdown in China. With the Chinese government having recently raised interest rates in an effort to cool the economy, that's a reasonable fear. But if you're willing to take on China risk, and you think that the global commodities trend will continue into the future, Puda is worth a closer look.
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 the best investments from the rest.
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