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 Navios Maritime (NYSE: NM ) 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 Navios Maritime.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||27.4%||Pass|
|1-Year Revenue Growth > 12%||1.4%||Fail|
|Margins||Gross Margin > 35%||43.3%||Pass|
|Net Margin > 15%||5.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||126.3%||Fail|
|Current Ratio > 1.3||1.47||Pass|
|Opportunities||Return on Equity > 15%||3.3%||Fail|
|Valuation||Normalized P/E < 20||12.43||Pass|
|Dividends||Current Yield > 2%||5.8%||Pass|
|5-Year Dividend Growth > 10%||(2.1%)||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Navios Maritime last year, the stock has lost three points. Slower revenue growth, a stagnant dividend, and plunging net margins all contributed to the decline.
Along with most of the shipping industry, Navios had a tough 2011. The Baltic Dry Index, which reflects shipping rates for Navios and its peers, failed to rebound significantly from its big drop since the financial crisis and remained at levels nearly 85% lower than in mid-2008. DryShips (Nasdaq: DRYS ) had to cut its dividend three years ago in light of the adverse conditions, and even though Navios and Diana Shipping (NYSE: DSX ) both have longer-term contracts in place to boost their average prices, they'll eventually expire and have to be replaced with new charters that could bring in a lot less profit.
As a result, shippers have had to be creative. For DryShips, that meant getting into ultra-deepwater drillships. Navios, on the other hand, has built up a logistics business, which has grown significantly and helped keep the company's share price outperforming many of its competitors.
The big question going forward for Navios is whether it can compete in a low-rate environment long-term. Genco Shipping (NYSE: GNK ) has managed to stay profitable even with low average charter rates. Still, in an industry where low margins are commonplace and revenue growth looks unlikely for the foreseeable future, Navios will have trouble getting much closer to perfection anytime soon.
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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