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 JetBlue (Nasdaq: JBLU ) 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 JetBlue.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||13.6%||Fail|
|1-Year Revenue Growth > 12%||19.8%||Pass|
|Margins||Gross Margin > 35%||28.4%||Fail|
|Net Margin > 15%||2.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||166.7%||Fail|
|Current Ratio > 1.3||1.13||Fail|
|Opportunities||Return on Equity > 15%||6.5%||Fail|
|Valuation||Normalized P/E < 20||17.67||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at JetBlue last year, the company has dropped a point. But revenue growth has helped the airline's stock manage to break even over the past year, even though several of its rivals gained altitude over the same period.
The airline industry has given investors a turbulent ride for years. Lately, though, the industry has been in an upswing, as the imposition of baggage and other fees has led to increased revenue for many alrlines. United Continental (NYSE: UAL ) and Delta (NYSE: DAL ) have turned profits in each of the past two years, and despite plunging share prices for most of the airline industry in 2011, the stocks have started to recover.
JetBlue has excelled in one important area: customer satisfaction. The airline topped the list in the budget-oriented category of JD Power's North America Airline Satisfaction Study, besting Southwest Airlines (NYSE: LUV ) . But given its choice to eschew many of the fees that the larger carriers charge, JetBlue has had trouble translating its popularity into profitability.
One thing helping JetBlue and its peers is the recent drop in the price of oil. Fuel costs are a huge component of JetBlue's overall expenses, and so any relief on the energy front translates into a big boost for the airline.
Consolidation in the industry could also give JetBlue a boost. With US Airways (NYSE: LCC ) vying to combine with bankrupt American Airlines parent AMR, less competition could make it easier to boost fares.
For JetBlue to improve, though, it needs to get its debt under control and look for ways to translate higher revenue into stronger profits. Without that magic formula, JetBlue may never fly high enough to reach perfection.
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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