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 Arkansas Best (Nasdaq: ABFS ) 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 Arkansas Best.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.3%||Fail|
|1-Year Revenue Growth > 12%||10.4%||Fail|
|Margins||Gross Margin > 35%||8.1%||Fail|
|Net Margin > 15%||0.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||16.8%||Pass|
|Current Ratio > 1.3||1.61||Pass|
|Opportunities||Return on Equity > 15%||0.2%||Fail|
|Valuation||Normalized P/E < 20||92.32||Fail|
|Dividends||Current Yield > 2%||0.9%||Fail|
|5-Year Dividend Growth > 10%||(27.5%)||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Arkansas Best last year, the company has lost a point. Slow revenue growth is to blame for the score drop, but what has investors really worried is the 50% drop in its share price over the past year.
The entire transportation sector has gotten hurt badly from a tough environment recently, and trucking companies have had a worse time of it than their peers in other areas. High oil prices make trucking operations especially expensive, which pushed shares of Swift Transportation (NYSE: SWFT ) , Arkansas Best, and Con-way (NYSE: CNW ) sharply downward in 2011.
Arkansas Best managed to get one thing accomplished: It became profitable. But its fourth-quarter results still fell well short of expectations, as price increases led to a drop in tonnage and a miss on the revenue front as well. Still, even with its sky-high earnings multiple making it clear that its profits are minimal, Arkansas Best still took a step in the right direction.
Yet Arkansas Best has struggled even in relation to its peers. Back in April, analysts upgraded rival CH Robinson (Nasdaq: CHRW ) but downgraded Arkansas Best. Yet as Fool contributor Rich Smith described at the time, Arkansas Best trades below its book value, suggesting a margin of safety that should help its stock hold up.
As long as energy prices remain high, giving CSX (NYSE: CSX ) and competing railroads a big advantage on fuel costs, Arkansas Best will struggle to improve. Investors would be best off waiting for a better time for the company to take strides toward getting closer to perfection before buying shares.
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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