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 FedEx (NYSE: FDX ) 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 FedEx.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4%||Fail|
|1-Year Revenue Growth > 12%||11%||Fail|
|Margins||Gross Margin > 35%||24.9%||Fail|
|Net Margin > 15%||4.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||10.5%||Pass|
|Current Ratio > 1.3||1.52||Pass|
|Opportunities||Return on Equity > 15%||11.5%||Fail|
|Valuation||Normalized P/E < 20||16.40||Pass|
|Dividends||Current Yield > 2%||0.6%||Fail|
|5-Year Dividend Growth > 10%||7.8%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at FedEx last year, the company has picked up a point. Yet although the stock is more affordably priced, the company still faces a stubborn recession that only recently has shown signs of finally ending in earnest.
FedEx has posted some strong results recently. In its just-announced fiscal second quarter, the company saw a increase in profits of 76%, with a big jump in operational margins and a 10% jump in sales. In particular, a healthy online holiday shopping season boosted the company's residential delivery services, and with FedEx's quarter having ended Nov. 30, it could still benefit from December holiday rush deliveries as well.
Interestingly, FedEx recently decided to raise its prices by an average of nearly 6%. The move shows just how strong it and rival UPS (NYSE: UPS ) are, especially with the U.S. Postal Service struggling just to survive. It also demonstrates the premium that businesses and consumers alike put on fast delivery, as trucking companies Swift Transportation (NYSE: SWFT ) and Con-way (NYSE: CNW ) have both struggled to deal with the particularly big impact that high fuel prices and struggling local economies have had on their businesses.
One way FedEx is expressing its strength is through expansion, having recently opened a new express facility in China. It's also modernizing its fleet, having entered into a deal with Boeing (NYSE: BA ) to buy $4.7 billion in new freight-carrying planes that should help the company save on fuel costs.
Still, FedEx has a long way to go to reach perfection. But if its rate hike boosts margins, it'll have gotten itself on the way toward getting a few more points in the near future.
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."