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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 U.S. Steel (NYSE: X ) 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 U.S. Steel.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.1%||Fail|
|1-Year Revenue Growth > 12%||10.1%||Fail|
|Margins||Gross Margin > 35%||9.2%||Fail|
|Net Margin > 15%||(0.9%)||Fail|
|Balance Sheet||Debt to Equity < 50%||119.0%||Fail|
|Current Ratio > 1.3||1.59||Pass|
|Opportunities||Return on Equity > 15%||(5.0%)||Fail|
|Valuation||Normalized P/E < 20||15.62||Pass|
|Dividends||Current Yield > 2%||1.1%||Fail|
|5-Year Dividend Growth > 10%||(22.2%)||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at U.S. Steel last year, the company hasn't been able to improve on its two-point score. Macroeconomic conditions for steel production have deteriorated significantly in the past year, contributing to a loss of more than 50% for U.S. Steel's stock.
Once a colossus of American manufacturing, the steel industry now finds itself tied to China's economic success. With growth in China starting to teeter, stocks throughout the sector have fallen sharply. Even Nucor (NYSE: NUE ) and Steel Dynamics (Nasdaq: STLD ) , both of which have maintained fairly healthy business activity, got hurt by the Chinese slowdown earlier this year, as they noted impacts to margins and earnings from falling demand.
But U.S. Steel has particularly difficult challenges to face. Like ArcelorMittal (NYSE: MT ) , U.S. Steel has enough exposure to eurozone economies through its European division that it has felt the pinch from the sovereign debt crisis there. Yet like AK Steel (NYSE: AKS ) , U.S. Steel faces pension shortfalls and lacks the cash flow to remedy the situation easily.
U.S. Steel isn't likely to see a big jump in its score unless the global economy starts to perk up more strongly. With China having had to cut its interest rates to stimulate demand, the kind of global growth that U.S. Steel has benefited from in recent years doesn't look as likely to sustain itself into the future. Investors shouldn't expect U.S. Steel to become a perfect stock in the short run.
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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