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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 whether Alliance Resource Partners (Nasdaq: ARLP ) 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. Although 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 a 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.
- Moneymaking 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 Alliance Resource Partners.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||13.4%||Fail|
|1-Year Revenue Growth > 12%||28.9%||Pass|
|Margins||Gross Margin > 35%||34.8%||Fail|
|Net Margin > 15%||16.0%||Pass|
|Balance Sheet||Debt to Equity < 50%||142.7%||Fail|
|Current Ratio > 1.3||3.24||Pass|
|Opportunities||Return on Equity > 15%||79.5%||Pass|
|Valuation||Normalized P/E < 20||12.98||Pass|
|Dividends||Current Yield > 2%||4.7%||Pass|
|5-Year Dividend Growth > 10%||14.2%||Pass|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With seven points, Alliance Resource Partners is powering up shareholders toward perfection. The company has benefited from rising energy prices, and with the future of nuclear energy called into question by the Japanese disaster, the coal producer may prove to have a second wind.
Alliance produces coal primarily to turn around and sell it to utilities, which then use it to generate electricity. It's structured as a master limited partnership, which gives it certain tax benefits over regular corporations. In addition, it's the reason Alliance has a much higher dividend yield than competitors Arch Coal (NYSE: ACI ) , Peabody Energy (NYSE: BTU ) , and CONSOL Energy (NYSE: CNX ) .
In fact, it's Alliance's dividend that makes it stand out from the pack. Over the past 10 years, the company has increased its payout a whopping 25 times. The frequent raises also contribute to its fast dividend-growth rate.
Of course, dividends are worthless if a company doesn't have earnings to back them up. But Alliance scores well in that regard as well. In its most recent quarter, the company posted 11% revenue growth, with net income rising by almost 28%. Those impressive returns have captured the attention of coal investors.
With the leverage necessary to produce such massive returns on equity and the ups and downs of any commodity business, Alliance may never reach perfect-10 status. But if you're looking for solid, growing income and good prospects for future growth, you could certain do worse than Alliance.
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.