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 US Airways
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 US Airways.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 6.2% | Fail |
| 1-year revenue growth > 12% | 12.4% | Pass | |
| Margins | Gross margin > 35% | 19.7% | Fail |
| Net margin > 15% | 1.9% | Fail | |
| Balance sheet | Debt to equity < 50% | 7,118% | Fail |
| Current ratio > 1.3 | 0.99 | Fail | |
| Opportunities | Return on equity > 15% | NM | NM |
| Valuation | Normalized P/E < 20 | 6.33 | Pass |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total Score | 2 out of 9 |
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative shareholder equity. Total score = number of passes.
US Airways isn't flying high with a score of just two points. Despite a recent bounce, the airline has suffered greatly from turbulence that has affected the entire industry.
2010 was actually a strong year for airlines. Unprecedented levels of fee revenue added up to billions in profits for the industry, which had better earnings in the year's first nine months than in any full year in more than a decade.
But as has always happened in the past, those good times appear to be coming to an end. Fuel costs have risen by almost half over year-ago levels at US Airways, and margins will inevitably get hit as a result. In the first quarter, Delta Air Lines
It's true that some airlines, including Southwest
Few airline stocks look anything close to perfect right now, and US Airways is no exception. You'd do well to follow Warren Buffett's advice and steer clear of the airline sector right now.
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.
