Is Hub Group the Perfect Stock?

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 Hub Group (Nasdaq: HUBG  ) 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 Hub Group.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

9.4%

Fail

 

1-Year Revenue Growth > 12%

41.1%

Pass

Margins

Gross Margin > 35%

11.5%

Fail

 

Net Margin > 15%

2.2%

Fail

Balance Sheet

Debt to Equity < 50%

6.2%

Pass

 

Current Ratio > 1.3

1.47

Pass

Opportunities

Return on Equity > 15%

13.7%

Fail

Valuation

Normalized P/E < 20

21.32

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With a score of only 3, Hub Group hasn't taken shareholders very far lately. The shipping company has seen big growth over the past year, but razor-thin margins have kept earnings in check.

Hub Group provides freight shipping and logistics services for intermodal and truck-based transport. But unlike dedicated trucking companies like J.B. Hunt (Nasdaq: JBHT  ) or rail transporters like Norfolk Southern (NYSE: NSC  ) , Hub Group doesn't own shipping assets of its own. Rather, the company simply facilitates transport, acting as a middleman between customers and shipping companies.

Hub Group isn't alone in that business, though. C.H. Robinson (Nasdaq: CHRW  ) provides similar services to tens of thousands of customers, and Expeditors International of Washington (Nasdaq: EXPD  ) and Pacer International (Nasdaq: PACR  ) have a similar business model. Both C.H. Robinson and Expeditors International have much wider margins and stronger returns on equity than Hub. Pacer is down and out after losing its exclusive contract with Union Pacific (NYSE: UNP  ) , but it's finally on the upswing as it starts rebuilding its relationships.

Earlier this week, two analysts downgraded Hub despite strong revenue and earnings gains in the third quarter, citing limited upside prospects. But if the economy can keep climbing out of its hole, there's definitely a place for Hub in a recovery -- and that could push the stock a lot closer to perfection.

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.

Click here to add Hub Group 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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Pacer International. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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