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 Lincoln Electric (Nasdaq: LECO ) 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 Lincoln Electric.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.3%||Fail|
|1-Year Revenue Growth > 12%||30.3%||Pass|
|Margins||Gross Margin > 35%||26.6%||Fail|
|Net Margin > 15%||7.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||7.6%||Pass|
|Current Ratio > 1.3||2.27||Pass|
|Opportunities||Return on Equity > 15%||16.8%||Pass|
|Valuation||Normalized P/E < 20||18.94||Pass|
|Dividends||Current Yield > 2%||1.8%||Fail|
|5-Year Dividend Growth > 10%||10.3%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of six, Lincoln Electric does pretty well, especially in a tough economy. The company has a fairly narrow niche, but it's famous for a policy that few companies share in this day and age.
Lincoln Electric makes welding and cutting products, including arc welding torches and power sources. Its products are used in a variety of industries, ranging from power generation and steel construction to shipbuilding and offshore oil and gas exploration. The company counts Illinois Tool Works (NYSE: ITW ) as a competitor, and Kennametal (NYSE: KMT ) also operates in the same general space.
But what has set Lincoln Electric apart from most other companies is its no-layoff policy. For 63 years and counting, the company has never let anyone go due to a lack of work, and that has helped the company's stock outperform the broader averages over the long term. With studies showing that a basket of top employers like Google (Nasdaq: GOOG ) and Amazon.com (Nasdaq: AMZN ) has outperformed the S&P 500 by a substantial amount over long periods of time, Lincoln's record seems to translate to strong performance.
Lincoln has survived a number of downturns before, but with energy still running on all cylinders, the company has a solid revenue base to count on. If steel producers like U.S. Steel (NYSE: X ) and shipbuilders can come back from their slump, then Lincoln could be in a better position to capitalize and move closer to perfection.
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 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."