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 AK Steel (NYSE: AKS ) 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 AK Steel.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.7%||Fail|
|1-Year Revenue Growth > 12%||34.7%||Pass|
|Margins||Gross Margin > 35%||5.0%||Fail|
|Net Margin > 15%||(2.0%)||Fail|
|Balance Sheet||Debt to Equity < 50%||116.4%||Fail|
|Current Ratio > 1.3||1.45||Pass|
|Opportunities||Return on Equity > 15%||(16.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||1.4%||Fail|
|5-Year Dividend Growth > 10%||0.0%*||Fail|
|Total Score||2 out of 9|
Source: Capital IQ, a division of Standard and Poor's. * 3-year growth rate. Total score = number of passes.
AK Steel can only forge a score of 2, leaving it well short of perfection. The steelmaker has been in the right industry at the right time, but it hasn't been able to capitalize on the opportunities around the world as well as some of its competitors.
AK Steel is a relatively small player in the steel industry. Without the economies of scale of larger rivals U.S. Steel (NYSE: X ) or ArcelorMittal (NYSE: MT ) , AK Steel relies primary on U.S. sales and gets more than a third of its business from the automotive industry. That leaves the company particularly exposed to the U.S. economy, whose sluggish recovery has likely played a role in AK Steel's slow growth.
Unfortunately, steel producers are heavily reliant on the costs of the raw materials that go into making the metal, and AK Steel is no exception. Along with Nucor (NYSE: NUE ) , AK Steel has had to raise prices on its products to offset rising costs of iron ore and other input commodities. That has hurt AK Steel's net margins , pushing them below even those of fellow niche producer Steel Dynamics (Nasdaq: STLD ) .
In time, AK Steel should capitalize from economic growth. But with massive debt and an earnings hole to dig out of, the steelmaker's stock isn't going to reach perfection anytime soon.
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."