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
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
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
Diana has had some resistance to the tough industry. Both it and Navios Maritime Holdings
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.
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