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 ITT
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 ITT.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (23.2%) | Fail |
| 1-Year Revenue Growth > 12% | 11.1% | Fail | |
| Margins | Gross Margin > 35% | 30.5% | Fail |
| Net Margin > 15% | (11.5%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 3.2% | Pass |
| Current Ratio > 1.3 | 2.01 | Pass | |
| Opportunities | Return on Equity > 15% | (19.9%) | Fail |
| Valuation | Normalized P/E < 20 | 13.36 | Pass |
| Dividends | Current Yield > 2% | 2.1% | Pass |
| 5-Year Dividend Growth > 10% | 4.7% | Fail | |
| Total Score | 4 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at ITT last year, the company has kept its four-point score. But the company looks far different from how it did back then, with its having spun off several of its businesses.
The big news for ITT in the past year was its spinoff of Exelis and Xylem
Interestingly, this isn't the first time ITT has done big spinoffs. Back in 1994, it separated itself from its Rayonier
What's left of ITT now is its industrial products division, but it still makes products for some of its old industries, including aerospace. Looking forward, the company's big draw is its ability to make what it calls "highly engineered" products, many of which have a built-in competitive moat.
For ITT to improve, it needs to consolidate after its most recent split-up and keep focusing on what it does best. If its customers continue to recover, then ITT could be in a better position in the years to come.
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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