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 PACCAR (Nasdaq: PCAR ) 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 PACCAR.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3.3%)||Fail|
|1-Year Revenue Growth > 12%||43.6%||Pass|
|Margins||Gross Margin > 35%||13.4%||Fail|
|Net Margin > 15%||5.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||101.4%||Fail|
|Current Ratio > 1.3||1.83||Pass|
|Opportunities||Return on Equity > 15%||13.3%||Fail|
|Valuation||Normalized P/E < 20||20.99||Fail|
|Dividends||Current Yield > 2%||1.9%||Fail|
|5-Year Dividend Growth > 10%||(0.1%)||Fail|
|Total Score||2 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only two points, PACCAR looks like it's stalled out in a flash flood. But although the truckmaker has suffered in a tough environment that has threatened the entire trucking industry, there've been several signs more recently that things have started to turn around.
PACCAR makes 18-wheelers and other commercial trucks as well as the parts that maintain them. In a strong economy, trucking typically sees a cyclical upswing, supporting PACCAR's financial results. But during the recession, PACCAR suffered as a combination of lower demand and high fuel costs pushed transportation toward railroads like Union Pacific (NYSE: UNP ) , CSX (NYSE: CSX ) , and Canadian National Railway (NYSE: CNI ) .
But as the economy has recovered, so, too, has the trucking industry. Despite the high-profile troubles that YRC Worldwide has gone through, many better-backed trucking companies, including Heartland Express (Nasdaq: HTLD ) and Knight Transportation (NYSE: KNX ) , have benefited greatly from increases in tonnage transported. Those trends all favor PACCAR, as these companies need new trucks.
Expectations are now high for PACCAR, and the company disappointed back in July when it announced earnings that more than doubled from year-ago levels but still fell short of analyst projections. With shares at fairly lofty levels -- more expensive than rival Navistar (NYSE: NAV ) on an earnings multiple basis -- PACCAR needs to see continued growth to justify its current valuation. If it gets that growth, it could easily climb out of the basement and up toward perfection quite quickly.
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.