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
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.
|
Factor |
What We Want to See |
Actual |
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
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
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
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.
