Has Diana Shipping Become the Perfect Stock?

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 Diana Shipping (NYSE: DSX  ) 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 Diana Shipping.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 13.5% Fail
  1-Year Revenue Growth > 12% (13.2%) Fail
Margins Gross Margin > 35% 72.6% Pass
  Net Margin > 15% 38.4% Pass
Balance Sheet Debt to Equity < 50% 32% Pass
  Current Ratio > 1.3 9.43 Pass
Opportunities Return on Equity > 15% 8% Fail
Valuation Normalized P/E < 20 10.38 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Diana Shipping last year, the company has lost two points. Plunging revenue is to blame for the decline, which has sent the shares down by more than 25% over the past year.

Diana primarily focuses on shipping dry goods, and for years, the shipping industry has suffered greatly. During boom times, Diana and peers DryShips (Nasdaq: DRYS  ) and Genco Shipping (NYSE: GNK  ) enjoyed huge amounts of business as commodities moved around the world. In response, many shipping companies ordered new vessels to meet that demand. Unfortunately, when the demand dried up, it left the industry with a big glut, and so Diana and its peers now face low rates and a general lack of business volume.

Much of the recent volatility in the sector has come from uncertainties about global growth prospects. For instance, in May, shares of Diana, Navios Maritime Partners (NYSE: NMM  ) , and several other shipping stocks soared on news that China would pursue pro-growth policies. Yet when less optimistic news comes out, Diana tends to lose that ground again.

Diana has had some resistance to the tough industry. Both it and Navios Maritime Holdings (NYSE: NM  ) have long-term contracts in place that have slowed the decline in their overall revenue. But as those long-term contracts expire, it's impossible to replace the rates they offered, extending the downturn.

For Diana to recover, it simply needs shipping activity to increase enough for rates on its vessels to rise. That likely won't happen in the near future, putting further pressure on Diana and its peers to see which companies can survive the long drought until the next bullish cycle starts.

Keep searching
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 the best investments from the rest.

Diana Shipping 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 Diana Shipping to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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