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 United Technologies (NYSE: UTX ) 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 United Technologies.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.6%||Fail|
|1-Year Revenue Growth > 12%||9.5%||Fail|
|Margins||Gross Margin > 35%||27.9%||Fail|
|Net Margin > 15%||8.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||47.5%||Pass|
|Current Ratio > 1.3||1.32||Pass|
|Opportunities||Return on Equity > 15%||22.4%||Pass|
|Valuation||Normalized P/E < 20||14.07||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||13.3%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at United Technologies last year, the company has shown dramatic improvement, with a 2-point rise from last year's score of 4. The defense-oriented conglomerate has made some improvements on its balance sheet that earned it those two points, and revenue growth over the past year has also been promising.
United Technologies combines several different businesses under one roof. While it's best known for its aerospace and defense products, it also builds elevators, HVAC equipment, and fire safety systems.
Many big companies, including fellow conglomerate Tyco (NYSE: TYC ) and drug giant Abbott Labs (NYSE: ABT ) , have looked to scale down by splitting up into separate companies lately. But United Technologies still seems interested in going the other direction, as rumors have flown for quite a while about its potentially making another acquisition. Although Textron (NYSE: TXT ) and Rockwell Collins were among possible candidates, the winning target turned out to be aerospace manufacturer Goodrich (NYSE: GR ) . The $16.5 billion deal would go a long way toward building out United Technologies' exposure to the non-military aerospace industry.
Like more defense-focused giants Lockheed Martin (NYSE: LMT ) and General Dynamics (NYSE: GD ) , United Technologies has suffered from concerns about falling defense spending. But with a strong dividend that has shown consistent, substantial growth for years, United Technologies currently trades at a very attractive valuation. For a stock that looks poised to get even closer to perfection in the years ahead, United Technologies looks like a great buy right now.
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.