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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 if Huntsman (NYSE: HUN ) 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 Huntsman.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.2%||Fail|
|1-Year Revenue Growth > 12%||21.6%||Pass|
|Margins||Gross Margin > 35%||16.8%||Fail|
|Net Margin > 15%||2.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||187.4%||Fail|
|Current Ratio > 1.3||2.08||Pass|
|Opportunities||Return on Equity > 15%||15.4%||Pass|
|Valuation||Normalized P/E < 20||11.25||Pass|
|Dividends||Current Yield > 2%||3.3%||Pass|
|5-Year Dividend Growth > 10%||0%*||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. *Since Huntsman's first dividend in March 2007. Total score = number of passes.
With five points, Huntsman finishes in the middle of the pack. The specialty chemical maker is facing higher raw material costs and could have trouble passing them on to customers through by raising prices.
Huntsman makes chemical products for a number of different industries, ranging from pigments and construction products to electronics and aerospace applications. One area where the company has seen a lot of success is in titanium dioxide, which has seen huge price jumps. PolyOne (NYSE: POL ) and Kronos Worldwide (NYSE: KRO ) have both experienced the same strong results in their titanium dioxide businesses that Huntsman has seen.
In order to keep up with higher raw materials costs, Huntsman has joined DuPont (NYSE: DD ) and Dow Chemical (NYSE: DOW ) in announcing price hikes for several of its products. Those hikes should increase revenue, but given the higher expenses Huntsman is facing, that may not lead to significant growth on the bottom line.
Huntsman carries a lot of debt, which has to worry investors who fear the economy may be headed for another recession. But if the economy continues to chug along, then Huntsman's dividend yield above 3% looks fairly attractive. Huntsman isn't perfect, but it might be the answer for income-hungry investors looking to diversify into cyclically sensitive industries.
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 Huntsman 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.