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 United Continental (NYSE: UAL ) 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 United Continental.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||14.2%||Fail|
|1-Year Revenue Growth > 12%||37.1%||Pass|
|Margins||Gross Margin > 35%||25.8%||Fail|
|Net Margin > 15%||1.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||823.6%||Fail|
|Current Ratio > 1.3||0.90||Fail|
|Opportunities||Return on Equity > 15%||35.4%||Pass|
|Valuation||Normalized P/E < 20||12.59||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at United Continental last year, the company has picked up a point, with returns on equity rising substantially. The stock is up nearly 20%, as the airline has done a good job of raising revenue, at least for now.
Airlines have been lousy investments over the long haul, with countless bankruptcies wiping out equity investors in the past. But at least this year, airline stocks have soared. US Airways (NYSE: LCC ) in particular has soared more than 175% this year as lower fuel costs and a potential buyout of bankrupt American Airlines have spurred a turnaround. But United and other peers are benefiting from less competition and rising fee revenue.
In fact, United Continental is making an even bigger bet on growth and increased efficiency. It ordered 100 737 MAX aircraft from Boeing (NYSE: BA ) , expanding its fleet by 15%. By contrast, Delta Air Lines (NYSE: DAL ) chose not to order from the MAX line, instead buying lower-efficiency 737-900ER planes instead. It's unlikely that Delta's recent purchase of an oil refinery will offset lost fuel savings from flying less-efficient planes.
In addition, United Continental has tested a blend of Solazyme (Nasdaq: SZYM ) -produced biofuel on what it called an Eco-Skies flight late last year. Biofuel remains expensive for now, but it could be the wave of the future if oil prices stay high and biofuel technology continues to advance.
For United Continental to keep improving, it needs to stay profitable long enough to start working down its massive debt. Only then will the airline be in a position to provide lasting growth for shareholders over the long haul.
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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