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 Empire District Electric (NYSE: EDE ) 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 Empire District Electric.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.4%||Fail|
|1-Year Revenue Growth > 12%||2.0%||Fail|
|Margins||Gross Margin > 35%||55.4%||Pass|
|Net Margin > 15%||9.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||101.4%||Fail|
|Current Ratio > 1.3||0.88||Fail|
|Opportunities||Return on Equity > 15%||7.8%||Fail|
|Valuation||Normalized P/E < 20||16.22||Pass|
|Dividends||Current Yield > 2%||4.8%||Pass|
|5-Year Dividend Growth > 10%||(4.8%)||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Empire District Electric last year, the company hasn't been able to boost its three-point score. But the utility's shares have recovered nicely from a big disaster for the company last year.
Utilities in general have fared pretty well over the past year. A big decline in natural gas prices helped bring their input costs down, making it cheaper for Southern Company (NYSE: SO ) , Dominion (NYSE: D ) , and Consolidated Edison (NYSE: ED ) to provide service for their customers. That in turn has delivered pretty solid stock performance to the industry over the past year.
But Empire faced unique challenges. After a huge tornado hit Joplin, Mo., Empire had to deal with the double-hit of major repair costs combined with the reduced demand that came from the destruction of 8,000-10,000 structures. In response, the company suspended its dividend temporarily to divert cash toward repairs.
Since then, though, Empire has recovered nicely. It restored a $0.25 per share quarterly dividend earlier this year, and although the shares haven't reached their pre-disaster highs, they've still climbed significantly since the disaster struck. Empire's cost structure hasn't improved as much as those three larger companies, but higher revenue helped produce profit growth in 2011.
For Empire to keep moving in the right direction, it needs to focus on revenue and dividend growth. It already has a nice yield, but some payout stability will go a long way toward restoring long-term confidence in the utility's shares going forward.
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.
Empire District Electric isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Empire District Electric to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.