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 Alliance Resource Partners (Nasdaq: ARLP ) 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 Alliance Resource Partners.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||13.6%||Fail|
|1-Year Revenue Growth > 12%||12.8%||Pass|
|Margins||Gross Margin > 35%||33.3%||Fail|
|Net Margin > 15%||15.4%||Pass|
|Balance Sheet||Debt to Equity < 50%||109.7%||Fail|
|Current Ratio > 1.3||1.96||Pass|
|Opportunities||Return on Equity > 15%||65.4%||Pass|
|Valuation||Normalized P/E < 20||9.38||Pass|
|Dividends||Current Yield > 2%||6.8%||Pass|
|5-Year Dividend Growth > 10%||13.4%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Alliance Resource Partners last year, the company has kept its seven-point score. Even though the shares have dropped 20% over the past year, it has held up a whole lot better than many of its coal-producing peers.
The past year has been a terrible one for coal. With prices of natural gas cheaper than they've been for a decade, many electric utilities have switched to natural gas to generate electricity. Moreover, with the Chinese economy weakening, exports have been under pressure as well. That one-two punch sent Patriot Coal into bankruptcy earlier this week, and rivals Arch Coal (NYSE: ACI ) , Alpha Natural Resources (NYSE: ANR ) , and James River Coal (Nasdaq: JRCC ) are all expected to post severe losses this year.
But Alliance has managed to hold up as well as it has by making sure it had its production contracted out to buyers well in advance. In 2011, more than 90% of its sales were under long-term contracts, and with nearly all its production under contract well into 2013 and with some contracts extending into 2016, Alliance doesn't experience the ups and downs of changing coal prices right away.
Additionally, as a master limited partnership, Alliance pays healthy dividends to investors. The company has increased its payout for 16 quarters in a row -- an impressive feat in such an adverse environment.
Looking forward, Alliance may eventually suffer as long-term contracts begin to expire and require renewal at lower prices. Some utilities, including Southern (NYSE: SO ) , have sought to renegotiate similar contracts with coal providers. Still, at its attractive valuation, Alliance looks to remain one of the best performers in the coal industry for some time to come.
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.
Alliance Resource Partners is a smart way to play the energy space, but we've got another stock you should also look at. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects -- it's free but only available for a limited time, so click here today.
Click here to add Alliance Resource Partners to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.