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 Walter Energy
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 Walter Energy.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 16.8% | Pass |
| 1-year revenue growth > 12% | 65.9% | Pass | |
| Margins | Gross margin > 35% | 47.1% | Pass |
| Net margin > 15% | 20.6% | Pass | |
| Balance sheet | Debt to equity < 50% | 122% | Fail |
| Current ratio > 1.3 | 1.79 | Pass | |
| Opportunities | Return on equity > 15% | 35.1% | Pass |
| Valuation | Normalized P/E < 20 | 11.32 | Pass |
| Dividends | Current yield > 2% | 0.6% | Fail |
| 5-year dividend growth > 10% | 25.6% | Pass | |
| Total score | 8 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
With eight points, Walter Energy puts in an energetic showing. The coal producer has benefited from strong demand and buyout rumors, but its stock has declined recently in light of fears about flagging global economic strength.
Walter specializes in metallurgical coal, which steelmakers use in their production processes. Having bought out Western Coal late last year, Walter argues that it's the largest "pure-play" in met coal -- despite the fact that some of its more diversified competitors have much larger met coal reserves.
Unfortunately, the economic growth that fueled Walter's rise may be coming to a halt. Rio Tinto
Last week, Walter's shares went on a roller-coaster ride as speculation arose about a possible takeover bid. According to a U.K. newspaper, BHP Billiton
For Walter's lightning-fast growth to continue, the company needs to see continued economic strength in the developing world to spur demand for coal. Without that strength, Walter could easily fall back from its near-perfect record in short order.
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 ."
