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 Duke Energy (NYSE: DUK ) 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 Duke Energy.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.8%||Fail|
|1-Year Revenue Growth > 12%||4.9%||Fail|
|Margins||Gross Margin > 35%||39.0%||Pass|
|Net Margin > 15%||12.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||87.8%||Fail|
|Current Ratio > 1.3||1.23||Fail|
|Opportunities||Return on Equity > 15%||8.2%||Fail|
|Valuation||Normalized P/E < 20||17.06||Pass|
|Dividends||Current Yield > 2%||4.8%||Pass|
|5-Year Dividend Growth > 10%||(4.7%)||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Duke Energy last year, the utility company has lost a point, with its current ratio slipping below the pass line. But what's more important for Duke's future is the consolidation that's happening within the industry.
With a clear focus on power generation and transmission, Duke looks a lot more like a pure utility than it did before it spun off its natural-gas pipeline business into Spectra Energy (NYSE: SE ) four years ago. Certainly, Duke's fairly high debt levels, modest growth, and attractive dividend all fit the mold of typical utility stocks, matching up closely with rivals Southern Company (NYSE: SO ) and NextEra Energy (NYSE: NEE ) .
Right now, the key to Duke's future looks like its planned merger with Progress Energy (NYSE: PGN ) . The combination would make Duke the largest power company in the U.S., with a particularly strong presence in the Atlantic Southeast as well as parts of the Midwest. So far, the transaction seems to be on track, although regulators have foiled past attempts involving utilities such as Exelon (NYSE: EXC ) and Public Service Enterprise Group (NYSE: PEG ) .
Given the business model that Duke and its fellow utilities follow, it's unlikely ever to reach a perfect 10 on our scale. But if the company can return to dividend growth while looking to boost margins, Duke could get closer to perfection in the years to come -- especially with the growth opportunities that a Progress merger would bring.
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."