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 Ford (NYSE: F ) 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 Ford.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(4.1%)||Fail|
|1-Year Revenue Growth > 12%||2.1%||Fail|
|Margins||Gross Margin > 35%||14.8%||Fail|
|Net Margin > 15%||5.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||1,579%||Fail|
|Current Ratio > 1.3||1.23||Fail|
|Opportunities||Return on Equity > 15%||317%||Pass|
|Valuation||Normalized P/E < 20||9.76||Pass|
|Dividends||Current Yield > 2%||1.6%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||2 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Ford restored its dividend in Jan. 2012. Total score = number of passes.
Since we looked at Ford last year, the auto giant has dropped a point. Sales growth evaporated, but the balance sheet is getting into better shape, and the company started paying a dividend for the first time in six years.
Ford has come a long way in a tough environment for the auto industry. With CEO Alan Mulally's "One Ford" plan, the company has tried to develop a set of vehicles that work globally, rather than having to create diverse products for each geographical area. That is similar to the approach that Honda (NYSE: HMC ) and Toyota (NYSE: TM ) have traditionally taken, and both of those companies have achieved significant economies of scale that make it easier for them to focus on making each vehicle design as good as it can be rather than having to adjust to regional differences.
But the journey won't come without bumps in the road. Trouble in Europe has hit both Ford and General Motors (NYSE: GM ) recently, with GM in particular having to deal with special challenges from its Opel division. Yet Ford and GM need Europe, both because of the potential for growth on the eastern half of the continent and because the area's high fuel prices have spurred innovation in small cars, which will become increasingly important going forward.
One interesting area where Ford could dominate is in electric vehicles. The company has used its Focus model to develop a hybrid and expects the pure-electric version of the car to break the 100-mpg-equivalent barrier, the first to do so since Tesla (Nasdaq: TSLA ) hit the mark with its pricey Roadster model.
For Ford to achieve perfection, it needs to continue shoring up its balance sheet, which finally sports positive shareholder equity. If the company can get its debt rating up to investment grade, it could start a cascade effect that could vault Ford upward in a hurry.
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.
Ford has potential, but we think we have some more interesting prospects for the future. Take a look at the Fool's latest special report -- it's absolutely free. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.
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