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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 General Motors (NYSE: GM ) 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 General Motors.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3.9%)*||Fail|
|1-Year Revenue Growth > 12%||8.2%||Fail|
|Margins||Gross Margin > 35%||13.1%||Fail|
|Net Margin > 15%||4.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||35.4%||Pass|
|Current Ratio > 1.3||1.22||Fail|
|Opportunities||Return on Equity > 15%||18.2%||Pass|
|Valuation||Normalized P/E < 20||6.05||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *Compared to revenue of predecessor in bankruptcy.
With three points, General Motors hasn't quite gotten up to speed. The automaker has made some big strides since emerging from bankruptcy, but it still faces some big challenges.
Many people believe that General Motors got an unfair advantage over rival Ford (NYSE: F ) through its government bailout and bankruptcy filing. But even though the bankruptcy allowed GM to slash its debt, the lead-up to its near-failure wrought havoc on its product development. As a result, GM has had to play catch-up for a while now -- and Ford, Toyota (NYSE: TM ) , and Hyundai have taken advantage to make gains in GM's key U.S. market.
Internationally, though, GM has decidedly mixed results. In China, the company posted its best quarter ever with growth rates that easily outpaced the overall Chinese auto market's sluggish advance. Unfortunately, Ford and Honda (NYSE: HMC ) are showing strong growth as well, suggesting that China's domestic makers are suffering -- and raising the specter of possible import restrictions.
Meanwhile, in Europe, GM is hemorrhaging money. The company has lost $15.6 billion since 1999 from its European operations, and the losses are expected to continue in 2012. After repeated assurances from GM management, it still isn't clear exactly how the automaker plans to get things moving again there.
One direction GM is exploring overall is the electric vehicle market. Yet while Tesla Motors (Nasdaq: TSLA ) prepares to start shipping its Model S electric sedans as early as next month, GM's Chevy Volt got mired in controversy when a test crash resulted in a battery-related fire -- although the Volt has since been declared safe.
To keep improving, GM needs to find sustained growth and keep its newly cleaned-up balance sheet in good shape. No matter how much progress it makes, though, it will be years before GM can even get close to becoming a perfect stock.
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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