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 Modine Manufacturing
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 Modine Manufacturing.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (1.7%) | Fail |
| 1-Year Revenue Growth > 12% | 15.2% | Pass | |
| Margins | Gross Margin > 35% | 16% | Fail |
| Net Margin > 15% | 2.2% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 46.6% | Pass |
| Current Ratio > 1.3 | 1.53 | Pass | |
| Opportunities | Return on Equity > 15% | 9.9% | Fail |
| Valuation | Normalized P/E < 20 | 12.51 | Pass |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 4 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Modine Manufacturing last year, the company has seen its score improve by a point, with a more reasonable valuation taking hold as the company returned to profitability. A healthier auto and commercial vehicle industry has helped the parts manufacturer.
Modine makes a variety of products for the transportation industry, including heating and cooling systems for engines and transmissions. After suffering through the recession, the company has benefited from the rebound among its customer base. Tractor maker Deere
But Modine hasn't had smooth sailing for its stock price. In its most recent quarter, the company reported sales growth of only 4% despite posting a strong increase in earnings. Troubles in Europe are having an effect on automakers Ford
For Modine to get closer to perfection, resolution to the world's economic uncertainties would help immensely. As the economy improves, Modine should be in a better position to capitalize.
Keep searching
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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