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 Terex (NYSE: TEX ) 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 Terex.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(5.8%)||Fail|
|1-Year Revenue Growth > 12%||23.8%||Pass|
|Margins||Gross Margin > 35%||14.4%||Fail|
|Net Margin > 15%||(3.6%)||Fail|
|Balance Sheet||Debt to Equity < 50%||64.8%||Fail|
|Current Ratio > 1.3||2.57||Pass|
|Opportunities||Return on Equity > 15%||(6.0%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0.0%||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. NM = not meaningful due to negative earnings. Total score = number of passes.
Terex reaps only two points. The equipment maker has struggled through the global slowdown and is lagging behind some of its competitors.
If you need a big machine, Terex probably makes it. The company has lines of equipment for a wide variety of industries, including construction and infrastructure, refining, and recycling.
Of course, those industries all got hit hard during the recession. As a result, Terex has had trouble keeping its earnings up. Terex's income has fallen by more than half year over year, and although revenue has picked up in the past year, it's still down considerably from pre-financial-crisis levels. Moreover, because it doesn't have the exposure to the farm industry that Deere (NYSE: DE ) and Caterpillar (NYSE: CAT ) have, Terex hasn't benefited from strong crop prices that have driven farm equipment sales.
But Terex has had some good luck lately. It sold its mining equipment unit to Bucyrus just before Caterpillar bought out Bucyrus, giving Terex a nice gain on the equity it took in the deal. Now Terex is looking to capitalize on interest in port expansion to try to stand out from rival Manitowoc (NYSE: MTW ) .
Terex is clearly a play on the future of global economic growth. If the recovery is for real, then Terex should benefit. Until that happens, though, you can expect to see the company languish far from perfection.
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.
Click here to add Terex to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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.