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 Ford Motor (NYSE: F ) 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 Ford.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-year annual revenue growth > 15%||(5.5%)||Fail|
|1-year revenue growth > 12%||20.7%||Pass|
|Margins||Gross margin > 35%||15.7%||Fail|
|Net margin > 15%||5.4%||Fail|
|Balance sheet||Debt to equity < 50%||NM||NM|
|Current ratio > 1.3||1.34||Pass|
|Opportunities||Return on equity > 15%||NM||NM|
|Valuation||Normalized P/E < 20||15.92||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total Score||3 out of 8|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Ford has negative shareholder equity. Total score = number of passes.
Ford drives away with a score of three. That doesn't look too good, but the carmaker has made great strides in the past couple of years to get back to profitability.
A few years ago, Ford was on the brink of bankruptcy, weighed down by its huge debt load and burdensome structural costs. But since then, the company has taken numerous steps to dig itself out of its hole. Cutting overcapacity and using global platforms have helped the company be more profitable, and increases in the fuel efficiency of its vehicles tunes into the green energy movement.
The recovery hasn't been easy for Ford, though. Many feared that General Motors (NYSE: GM ) would have an unfair advantage by taking government help and going through the bankruptcy process to rid itself of its high cost structure. But a struggling Toyota (NYSE: TM ) , which has dealt with safety concerns and multiple product recalls, has done lasting damage to the idea that Japanese cars are better than American ones, and Ford has capitalized on that trend, passing Toyota to once again become the No. 2 automaker in U.S. sales.
Ford's stock has performed very well lately, but the best days may be coming to an end. Not only do the other members of Detroit's Big Three have their own success stories now, but foreign car companies like Nissan and Hyundai have also done a good job lately. Upstarts like Tesla (Nasdaq: TSLA ) pose a longer-term threat.
Even if Ford isn't the perfect stock, it shows how a turnaround story can be immensely profitable for those who get in early. Whether Ford continues its winning ways depends on the economy and a host of other factors, but betting against the company has proven a costly thing to do.
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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