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 Nucor (NYSE: NUE ) 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 Nucor.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.3%||Fail|
|1-Year Revenue Growth > 12%||26.4%||Pass|
|Margins||Gross Margin > 35%||9.7%||Fail|
|Net Margin > 15%||3.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||56.3%||Fail|
|Current Ratio > 1.3||2.80||Pass|
|Opportunities||Return on Equity > 15%||11.5%||Fail|
|Valuation||Normalized P/E < 20||16.85||Pass|
|Dividends||Current Yield > 2%||3.5%||Pass|
|5-Year Dividend Growth > 10%||29.4%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Nucor last year, the company has picked up a point. Somewhat slower growth held the stock back, but some improvement in margins and a big drop in its earnings multiple helped boost Nucor's score.
Tremors in the global economy's expansion have hit many steel stocks hard. Big companies U.S. Steel (NYSE: X ) and ArcelorMittal (NYSE: MT ) have seen their shares lose nearly half their value in the past year due to fears that Chinese demand could fall sharply in an expected slowdown. By contrast, Nucor shares have held up better, perhaps because of its locally oriented "mini-mills" that put production facilities closer to raw materials sources than at U.S. Steel, ArcelorMittal, and other larger steelmakers.
Nucor's outperformance may also result from the fact that, even with headwinds in the industry, Nucor had a successful 2011 from a business perspective. Earnings per share rose nearly 500% last year compared to 2010, and despite going through a short period of compressed margins, conditions returned to a more normal state late last year. CEO Dan DiMicco expects the company to keep growing despite concerns about Europe as well as regulatory burdens and the sluggish overall U.S. business environment.
More recently, though, Nucor gave some negative guidance for the first quarter of 2012. That's consistent with what peers Steel Dynamics (Nasdaq: STLD ) and AK Steel (NYSE: AKS ) said about their own prospects, with AK warning that it would actually lose money in the quarter. But these companies' fortunes could turn around in a hurry when steel buyers return to the market, as analysts expect they must at some point.
Nucor's dividend is its biggest favorable trait, and it should earn the stock a premium valuation. If Nucor can keep using its mini-mill infrastructure to boost margins, it could start moving further toward perfection in the years to come.
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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