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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 Delta Air Lines (NYSE: DAL ) 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 Delta.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||14%||Fail|
|1-Year Revenue Growth > 12%||13.2%||Pass|
|Margins||Gross Margin > 35%||23.1%||Fail|
|Net Margin > 15%||1.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||1708.6%||Fail|
|Current Ratio > 1.3||0.64||Fail|
|Opportunities||Return on Equity > 15%||103.9%||Pass|
|Valuation||Normalized P/E < 20||10.45||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of just 3, Delta Air Lines isn't flying high. Although the airline has come a long way from the depths of the recession, it still faces some tough headwinds.
Three years ago, many airlines looked like they were doomed to fail. Cash-strapped consumers had little disposable income to spend on travel, and business travel was also depressed. Combined with sky-high fuel prices, the airlines faced big hits on both ends of their income statements.
To survive, Delta and its peers responded by adding now-infamous fees for everything from baggage to food, as well as fuel surcharges. And even after the recovery took hold, airlines have not only maintained that ancillary income but also built upon it. Although Southwest Airlines (NYSE: LUV ) has built an entire marketing campaign around its lack of baggage fees, United Continental (NYSE: UAL ) , AMR (NYSE: AMR ) , and Delta have all kept lifting fees while also pushing general airfares higher as well.
Now, high fuel prices are back, as the endless cycle continues to turn. Delta has enjoyed good profitability of late, but until airlines fix their fundamental problems, they'll continue to move in and out of favor. That may work for a short-term trade, but without a big transformation for the entire industry, Delta will never be a perfect stock for a long-term investor.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.