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 Foster Wheeler (Nasdaq: FWLT ) 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 Foster Wheeler.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.3%||Fail|
|1-Year Revenue Growth > 12%||(2.2%)||Fail|
|Margins||Gross Margin > 35%||12.3%||Fail|
|Net Margin > 15%||3.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||16.7%||Pass|
|Current Ratio > 1.3||1.60||Pass|
|Opportunities||Return on Equity > 15%||19%||Pass|
|Valuation||Normalized P/E < 20||18.12||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With four points, Foster Wheeler hasn't yet built a perfect track record. The global engineering firm has obvious ties to the health of the world economy, and with everyone on eggshells wondering whether a double-dip recession is inevitable, the company's future looks unclear.
Foster Wheeler provides a wide array of engineering and construction services, with uses for the pharmaceutical, environmental, oil and gas, and power industries. With customers including Sasol (NYSE: SSL ) and Enbridge (NYSE: ENB ) , the company enjoyed huge growth during the boom years of the global economy, with exposure to emerging markets proving particularly helpful.
When economies slowed around the world, though, the company suffered. Like peers Jacobs Engineering (NYSE: JEC ) , Fluor (NYSE: FLR ) , and Shaw (NYSE: SHAW ) , Foster Wheeler had to retrench and focus on its core strengths. Compared to its competitors, though, Foster Wheeler has held up the best, with the strongest net margin and returns on equity of the four.
Recently, the company has put up some very strong numbers. In its most recent quarter, Foster Wheeler saw sales rise 18%, with wider margins and stronger income than expected. The bright spot for the company was in its global power segment, which overcame downward pressure from a slowdown in its engineering and construction division.
What comes next for Foster Wheeler depends on global macroeconomic conditions. If the recovery can sustain itself despite lousy economic reports in the U.S., then the company could push further toward perfection. But if not, Foster Wheeler could see another tough spell in the near future.
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 Foster Wheeler 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."