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 TAL International (NYSE: TAL ) 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 TAL International.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.1%||Fail|
|1-Year Revenue Growth > 12%||40.9%||Pass|
|Margins||Gross Margin > 35%||86.6%||Pass|
|Net Margin > 15%||21.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||411.1%||Fail|
|Current Ratio > 1.3||2.13||Pass|
|Opportunities||Return on Equity > 15%||22.1%||Pass|
|Valuation||Normalized P/E < 20||17.08||Pass|
|Dividends||Current Yield > 2%||5.4%||Pass|
|5-Year Dividend Growth > 10%||34.6%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With eight points, TAL International comes pretty close to perfection. The company isn't in the most glamorous business, but the money it makes pretty much speaks for itself.
TAL sells and leases containers that get used worldwide for various forms of transportation. Its dry freight containers are used for ordinary types of cargo, while it also produces refrigerated containers, tank containers, and other customized containers for specialized uses.
Many shipping-related companies have suffered greatly recently. Dry bulk shippers DryShips (Nasdaq: DRYS ) and Diana Shipping (NYSE: DSX ) have seen their charter rates fall dramatically as the Baltic Dry Index has remained at relatively low levels. Among tanker stocks, Frontline (NYSE: FRO ) in particular has faced a recent cash crisis, while Ship Finance International (NYSE: SFL ) is one of many companies that stands to have to deal with potential collateral damage from Frontline's woes. In general, a glut of ships and lackluster demand could leave the industry struggling for a while.
Despite bad conditions among shipping stocks, TAL has been having great results. For its most recent quarter, sales jumped 29% with earnings falling slightly but coming in better than estimated. It also raised its dividend for the sixth time in two years after having to cut its payout dramatically during the financial crisis. Investors rewarded the stock with a 10% jump.
Given the leveraged nature of its business, TAL is unlikely ever to reach a perfect 10. But as long as it can ride an extremely profitable business model to gains, investors shouldn't quibble about the stock falling short by a point or two.
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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