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 PPL (NYSE: PPL ) 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 PPL.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.2%||Fail|
|1-Year Revenue Growth > 12%||24.1%||Pass|
|Margins||Gross Margin > 35%||37.8%||Pass|
|Net Margin > 15%||13.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||167.4%||Fail|
|Current Ratio > 1.3||1.19||Fail|
|Opportunities||Return on Equity > 15%||14.1%||Fail|
|Valuation||Normalized P/E < 20||12.11||Pass|
|Dividends||Current Yield > 2%||5.1%||Pass|
|5-Year Dividend Growth > 10%||5.4%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at PPL last year, the utility company has gained a point. By boosting its gross margins by more than 10 percentage points, PPL demonstrates just how well utilities have performed over the past year.
Dividend-hungry investors have gravitated to utilities for much of the past year, although utility stocks have given back some of their gains in 2012. Bond guru Bill Gross named electric utilities with consistent returns on equity and high yields as value plays compared to other stocks and bonds. Along with peers Southern Company (NYSE: SO ) and FirstEnergy (NYSE: FE ) , PPL seems to meet that test.
One advantage that PPL has over some of its fellow utilities is that it's geographically diversified beyond U.S. borders. The company benefited from better business in its U.K. segment, beating sales and income estimates in its third quarter results. That has certainly helped London-based National Grid (NYSE: NGG ) , which shares PPL's territory in the northeastern U.S. as well as its home country.
The big question for utilities right now is whether natural gas prices will stay low, cutting costs for gas-fired plants and putting nuclear-powered rival Exelon (NYSE: EXC ) at a competitive disadvantage. If gas prices rise, then PPL will be hard-pressed to make a continued march toward a perfect score.
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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