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 DPL
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 DPL.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 7% | Fail |
| 1-Year Revenue Growth > 12% | 12.9% | Pass | |
| Margins | Gross Margin > 35% | 37.5% | Pass |
| Net Margin > 15% | 12.4% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 100.8% | Fail |
| Current Ratio > 1.3 | 0.88 | Fail | |
| Opportunities | Return on Equity > 15% | 19.4% | Pass |
| Valuation | Normalized P/E < 20 | 13.70 | Pass |
| Dividends | Current Yield > 2% | 4.4% | Pass |
| 5-Year Dividend Growth > 10% | 5.3% | Fail | |
| Total Score | 5 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
DPL charges up a middle-of-the-road score of 5. The electric utility is on the block with a deal, but shareholders seem to think they might get something extra beyond what the buyer is offering.
DPL is the parent company of Dayton Power & Light, which is an electric utility in western Ohio. Like fellow utilities Southern Company
That stability may well have been what AES
At least for now, the deal seems to be on. But shareholders have bid the shares up above the $30 offer price, suggesting that they're hoping for a higher bid. In the meantime, DPL shareholders will vote at the company's annual meeting Sept. 23 whether to approve the deal.
DPL might have been a perfect stock if AES hadn't swooped in for the kill. Now, though, it's a merger arbitrage play, with limited upside and big potential downside if the deal falls through. Whether DPL will reach perfection will soon rest on AES' shoulders.
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."
