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 US Airways (NYSE: LCC ) 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 US Airways.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.2%||Fail|
|1-Year Revenue Growth > 12%||8.5%||Fail|
|Margins||Gross Margin > 35%||20.9%||Fail|
|Net Margin > 15%||3.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||877.3%||Fail|
|Current Ratio > 1.3||1.03||Fail|
|Opportunities||Return on Equity > 15%||157%||Pass|
|Valuation||Normalized P/E < 20||6.72||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 US Airways last year, the company hasn't improved on its two-point performance. But shares of the airline have taken off, more than doubling over the past year as it looks to benefit from consolidation in the industry.
Airlines live and die with the price of oil, and lately, lower oil prices have helped boost shares across the industry. Even though United Continental (NYSE: UAL ) has bought fuel-efficient planes and Delta Air Lines (NYSE: DAL ) has purchased an oil refinery to internalize the disparities between crude oil and refined product prices, the impact of cheaper oil will always be positive for the industry.
But the big news for US Airways rests in its attempt to take over bankrupt American Airlines. By doing so, it will cement its place among United Continental and Delta as a major national carrier, but that won't necessarily guarantee it success. Regional airline Alaska Air (NYSE: ALK ) and discounter JetBlue (Nasdaq: JBLU ) have been more dependable from a profitability standpoint, making it unclear whether the economies of scale from being a big airline really pay off in this industry.
Still, in its most recent quarter, US Airways beat estimates, with profit more than tripling from year-ago levels to the highest levels in the airline's history. Higher passenger yields were a key ingredient of that success, and the company did a good job of controlling costs as well.
For US Airways to improve, it needs to build shareholder equity to get its debt-to-equity ratio down. Revenue growth is the next step, but the company will likely have to wait until the economy picks up more steam in order to make lasting progress toward 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 the best investments from the rest.
US Airways may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add US Airways to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.