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 Exide Technologies (Nasdaq: XIDE ) 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 is unable to produce profits from them. Strong margins ensure that a 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 Exide Technologies.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.1%||Fail|
|1-Year Revenue Growth > 12%||1.5%||Fail|
|Margins||Gross Margin > 35%||15.2%||Fail|
|Net Margin > 15%||(1.5%)||Fail|
|Balance Sheet||Debt to Equity < 50%||285.2%||Fail|
|Current Ratio > 1.3||1.63||Pass|
|Opportunities||Return on Equity > 15%||(13.0%)||Fail|
|Valuation||Normalized P/E < 20||271.14||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||1 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Exide Technologies only manages to earn a single point on this scale. The stock also hasn't performed very well lately, losing more than 40% in the past year.
Exide Technologies makes lead-acid batteries which, at first glance, seems like old technology compared to the lithium-based batteries that have gotten so much attention for use in hybrid vehicles. That perceived obsolescence may be one reason why the stock is trading at levels that Fool contributor Sean Williams sees as cheap, with optimistic forward earnings estimates for its 2014 fiscal year giving Exide a forward multiple of just four.
Exide is trying to engineer a turnaround, but it's unclear how successful it will be. So far, Exide's results haven't been good enough to make investors happy. Earlier this month, Exide announced a wider loss for its fiscal first quarter, with headwinds coming from the company's exposure to Europe, as well as higher costs, and decreased availability of battery material. Warmer temperatures over the winter also took away some of its aftermarket battery business.
The big question for Exide is the extent to which it can participate in a move toward electric vehicles. On one hand, the company does have some electric-vehicle manufacturers using lead-acid batteries, including the Indian REVAi. But with Tesla Motors (Nasdaq: TSLA ) and Ford (NYSE: F ) using lithium-based batteries for their electric and hybrid products, it's unclear whether Exide can really tap the broader market and beat out competitor EnerSys (NYSE: ENS ) , which has made moves to embrace lithium and has experienced strong earnings growth as a result.
To improve, Exide needs to make the most of its exclusive arrangement with Pep Boys (NYSE: PBY ) to supply aftermarket batteries. But, in the long run, Exide will depend on innovation in the auto industry moving more slowly than many expect.
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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