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 Fluor (NYSE: FLR ) 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 Fluor.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.5%||Fail|
|1-Year Revenue Growth > 12%||(0.6%)||Fail|
|Margins||Gross Margin > 35%||3.4%||Fail|
|Net Margin > 15%||1.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||2.4%||Pass|
|Current Ratio > 1.3||1.54||Pass|
|Opportunities||Return on Equity > 15%||13.0%||Fail|
|Valuation||Normalized P/E < 20||36.94||Fail|
|Dividends||Current Yield > 2%||0.7%||Fail|
|5-Year Dividend Growth > 10%||8.0%||Fail|
|Total Score||2 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just two points, Fluor doesn't look anything like a perfect stock. Despite some recent positive signs, the construction company hasn't been able to take maximum advantage of some profitable trends in its industry.
Fluor is a heavy construction contractor, helping put together efforts in the oil and gas, infrastructure, and power industries with engineering, design, and project management. Given high energy prices and an increasing demand for improved infrastructure in emerging markets, Fluor should be grabbing the opportunity to tap the global market to its advantage.
Yet looking at the numbers, Fluor is still reeling from the big drop-off in construction activity during the recession, despite having resisted it successfully for a long while. Growth has been slow, and margins are razor-thin. Competitors Jacobs Engineering (NYSE: JEC ) and Foster Wheeler (Nasdaq: FWLT ) have seen many of the same issues, but Fluor sports a higher valuation than those two rivals while having lower returns on equity than Foster Wheeler. Moreover, like Shaw Group (NYSE: SHAW ) , Fluor has exposure to the nuclear power plant construction industry, which is in question after the Japanese disaster.
Fortunately, things are starting to look up for Fluor. In its most recent earnings report, the company announced a major $3.1 billion award that pushed the company's project backlog substantially higher. If Fluor wants to become a perfect stock, it needs to see more of those announcements in the future.
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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