Is US Airways the Perfect Stock?

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 (NYSE: LCC  ) 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 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 (NYSE: DAL  ) , United Continental (NYSE: UAL  ) , and AMR's (NYSE: AMR  ) American all reported losses. Moreover, insiders appear to be jumping ship, with insider sales taking place across the industry without any buying activity.

It's true that some airlines, including Southwest (NYSE: LUV  ) , JetBlue (Nasdaq: JBLU  ) , and Alaska Air (NYSE: ALK  ) , have managed to stay profitable despite these trends. But while US Airways isn't at the bottom of the barrel in the industry, it lacks loyalty among its customers. That's why despite encouraging revenue and traffic numbers for July, US Airways has seen its shares plummet so far this year.

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.

Click here to add US Airways 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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 05, 2011, at 7:14 PM, totallyoblivious wrote:

    That's a whole lot of emphasis on past performance, and some flawed stats. Their debt to equity is a little under 200%, which obviously isn't fantastic, but it's no 7,118% like yahoo finance claims it to be. (2.189b cash on hand vs. 3.947b debt per their most recent 10-Q).

    They're trading dirt cheap on a trailing and forward looking P/E basis (~4 on both) and P/S (.07). The main thing holding their stock back is that they're very susceptible to high oil prices. But, oil prices have pulled back considerably in the past 2 weeks. If that continues to happen, this is a great stock to get into IMO.

    The biggest thing to worry about is QE3 happening or some other major world event that causes oil prices to turn north of $100 again. Whether or not to be in this stock isn't best determined by the criteria you've chosen, but on whether you're bullish or bearish on oil prices.

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