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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 Titanium Metals (NYSE: TIE ) 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 Titanium Metals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3.3%)||Fail|
|1-Year Revenue Growth > 12%||13.4%||Pass|
|Margins||Gross Margin > 35%||21.5%||Fail|
|Net Margin > 15%||10.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||7.7%||Pass|
|Current Ratio > 1.3||6.23||Pass|
|Opportunities||Return on Equity > 15%||9.1%||Fail|
|Valuation||Normalized P/E < 20||20.68||Fail|
|Dividends||Current Yield > 2%||2.4%||Pass|
|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 Titanium Metals last year, the company hasn't improved on its four-point score. The stock has sunk about 15% over the past year as just about the entire mining industry has gone through a downturn.
Titanium Metals primarily produces titanium for the aerospace industry, for use in aircraft manufacturing. With Boeing (NYSE: BA ) seeing big orders for commercial aircraft, you'd think that demand for the metal would be pretty much assured for years to come.
One problem that Titanium Metals has faced is that Boeing's 787 Dreamliner has been plagued by delays recently. That has hurt not only Titanium Metals but also rivals Allegheny Technologies (NYSE: ATI ) and Carpenter Technology (NYSE: CRS ) as well, because all three companies produce specialty metals that Boeing and other aircraft makers need.
In addition, a slowing global economy has made things tough for the entire metals industry. Between Europe's financial crisis and China's slowdown from lightning-fast growth rates, industrial metals producers have seen conditions deteriorate severely. Even in heavy metals, steel producer Nucor (NYSE: NUE ) has taken its lumps in light of slowing infrastructure spending, and countless other companies in steel, aluminum, and base metals have traded well off their highs for some time.
For Titanium Metals to rebound, it needs Boeing's Dreamliner to start flying and for the overall economic picture to get better. If that all happens, then Titanium Metals could get a lot closer to perfection fairly quickly.
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.
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