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 Ship Finance International
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 Ship Finance International.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (8.9%) | Fail |
| 1-Year Revenue Growth > 12% | (8.5%) | Fail | |
| Margins | Gross Margin > 35% | 70.8% | Pass |
| Net Margin > 15% | 51.1% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 240.2% | Fail |
| Current Ratio > 1.3 | 2.46 | Pass | |
| Opportunities | Return on Equity > 15% | 17.1% | Pass |
| Valuation | Normalized P/E < 20 | 15.87 | Pass |
| Dividends | Current Yield > 2% | 8.9% | Pass |
| 5-Year Dividend Growth > 10% | (9.5%) | Fail | |
| Total Score | 6 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 6, Ship Finance International may not be perfect, but it isn't taking on water either. The shipper has an attractive dividend, but times have been tough in the industry lately.
As its name suggests, Ship Finance purchases, sells, and leases a variety of shipping vessels, including dry bulk carriers, oil tankers, and drilling rigs. As such, it relies on business from other shipping companies, including Frontline
The problem is that the shipping industry has gone through stormy seas of late. Dry bulk shipping has suffered from huge oversupply of vessels and weak prices, forcing companies like DryShips
Those concerns, in turn, have led to Ship Finance posting poor results of its own in recent quarters. With no relief in sight, it's hard to predict whether Ship Finance's customers will be able to keep seeking shipping contracts or even be able to meet the obligations on their current leases.
Eventually, the shipping industry will return to a more normal course, and companies will look to Ship Finance to help them navigate the next business cycle. Until that happens, though, counting on a high dividend yield to save you is like sailing a boat through a hurricane without any life jackets.
Keep searching
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."
