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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Nucor (NYSE: NUE ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Nucor.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||4.5%||Fail|
|1-Year Revenue Growth > 12%||41.6%||Pass|
|Margins||Gross Margin > 35%||5.3%||Fail|
|Net Margin > 15%||0.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||59.4%||Fail|
|Current Ratio > 1.3||3.90||Pass|
|Opportunities||Return on Equity > 15%||2.8%||Fail|
|Valuation||Normalized P/E < 20||89.98||Fail|
|Dividends||Current Yield > 2%||3.1%||Pass|
|5-Year Dividend Growth > 10%||36.9%||Pass|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Nucor falls well short of perfection with a score of 4. The steel producer has seen a big rebound from the depths of the recession, but longer term its weak margins and low returns on equity counterbalance its strong dividend history.
Nucor has faced a tough environment for steel producers lately. U.S. Steel (NYSE: X ) has suffered losses, while top global player ArcelorMittal (NYSE: MT ) reported that it lost money in the fourth quarter. Along with AK Steel (NYSE: AKS ) , Nucor recently had to raise its prices on steel products in order to try to pass on the rising prices of the commodities it uses as inputs for steel production.
But things are looking up for the company. Nucor has started construction on a new plant in Louisiana, and despite having a debt-to-equity ratio above 50%, the company has a much cleaner balance sheet than Steel Dynamics (Nasdaq: STLD ) and most of its other competitors. With the prospects for stronger demand from a global rebound as well as the rebuilding from the Japanese earthquake , Nucor has better prospects than its score suggests.
As a cyclical stock dependent on strong economic activity, Nucor remains vulnerable to a potential double-dip or weaker-than-normal recovery. But for long-term investors, now may be the time when getting into Nucor makes the most sense.
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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