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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 MDU Resources (NYSE: MDU ) 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 MDU Resources.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.8%||Fail|
|1-Year Revenue Growth > 12%||3.5%||Fail|
|Margins||Gross Margin > 35%||22.6%||Fail|
|Net Margin > 15%||5.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||52.5%||Fail|
|Current Ratio > 1.3||1.48||Pass|
|Opportunities||Return on Equity > 15%||9%||Fail|
|Valuation||Normalized P/E < 20||17.66||Pass|
|Dividends||Current Yield > 2%||3.2%||Pass|
|5-Year Dividend Growth > 10%||4.9%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
When we looked at MDU Resources last year, it weighed in with the same score of 3. So far, the company hasn't cashed in on a huge opportunity in its region, but that opportunity still exists.
MDU is a company with an interesting mix of businesses. On one hand, the company operates as a standard gas and electric utility in the Northern Plains and Rocky Mountain regions. As a result, MDU has the same high debt levels and relatively low margins that you see in purer utility plays such as Duke Energy (NYSE: DUK ) . But the company also produces oil and natural gas, and it manufactures construction materials.
Lately, the huge flooding in the region has caused problems throughout its business. In its most recent quarter, earnings fell 8% due to declines in natural gas prices and production. The utility segment did well, but just as peers like Vulcan Materials (NYSE: VMC ) have seen, profits from its construction materials business fell.
But MDU's biggest potential still comes from its presence in the Bakken area of North Dakota. Along with EOG Resources (NYSE: EOG ) , Kodiak Oil & Gas (NYSE: KOG ) , and a host of other players, MDU has a double-helping of profit potential not just from production but also distribution of the oil and gas produced from the region.
For MDU to reach perfection, it has to get to the point where its oil and gas business dwarf its more stable utility segment. If energy prices and the weather start cooperating, then that day could come sooner than later for MDU.
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 MDU Resources 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.