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 Foster Wheeler (Nasdaq: FWLT ) 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 Foster Wheeler.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(1.4%)||Fail|
|1-Year Revenue Growth > 12%||(4.6%)||Fail|
|Margins||Gross Margin > 35%||13.7%||Fail|
|Net Margin > 15%||3.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||18.8%||Pass|
|Current Ratio > 1.3||1.44||Pass|
|Opportunities||Return on Equity > 15%||17.8%||Pass|
|Valuation||Normalized P/E < 20||16.85||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Foster Wheeler last year, the company hasn't improved on its four-point score. The global slowdown has hurt the stock, which has struggled just to get back to the break-even point recently.
Foster Wheeler handles engineering and construction projects for several major players in the oil and gas industry around the world. As you'd expect, that's been a hot area in recent years, as a massive expansion in energy production capacity around the world has led to a big increase in development activity. Yet the sluggish global economy has led to a pullback in spending on heavy construction projects. That's pulled down both Foster Wheeler and rival McDermott (NYSE: MDR ) , which has significant exposure to the Middle East.
More recently, though, the industry has seen some improvement. Fluor (NYSE: FLR ) said about four months ago that it had a huge $42.5 billion backlog, a record level that bodes well for continuing demand. Foster Wheeler also boosted its EPS forecast to suggest substantial growth over 2011. Even better, reports last week indicated that the Kuwaiti government had awarded Foster Wheeler a contract as a consultant to the country Al-Zour refinery project as well as a clean-fuel project. With the two projects expected to cost more than $30 billion combined, Foster Wheeler's victory over competing bidder Fluor is a big positive. Combined with a project from Shell announced today and another with Petroleo Brasileiro (NYSE: PBR ) earlier last month, Foster is doing well in beating out Jacobs Engineering Group (NYSE: JEC ) and its other rivals.
For Foster Wheeler to improve, it needs to see the global economy pick back up. Trends that sent oil prices below $100 per barrel are troubling for the industry, but energy construction isn't going to go away, and Foster will play a vital role in the business for years 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.
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