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 Steel Dynamics (Nasdaq: STLD ) 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 Steel Dynamics.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||17.2%||Pass|
|1-Year Revenue Growth > 12%||8.1%||Fail|
|Margins||Gross Margin > 35%||9.5%||Fail|
|Net Margin > 15%||2.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||97.4%||Fail|
|Current Ratio > 1.3||2.41||Pass|
|Opportunities||Return on Equity > 15%||6.2%||Fail|
|Valuation||Normalized P/E < 20||17.65||Pass|
|Dividends||Current Yield > 2%||3.5%||Pass|
|5-Year Dividend Growth > 10%||14.9%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With five points, Steel Dynamics finishes in the middle of the pack. The steel maker has also done a good job of holding its own in a tough environment, with a roughly flat performance for the shares over the past year.
The steel market in the U.S. has been operating well below capacity for a long time. With manufacturing activity remaining stubbornly slow, many of Steel Dynamics' peers have taken dramatic steps to try to survive. Last month, Schnitzer Steel (Nasdaq: SCHN ) decided to lay off about 7% of its workforce as its scrap recycling business faces declines of 10%-15% in the prices it fetches for iron scrap. With a strong dollar making imported steel from ArcelorMittal (NYSE: MT ) and other international sources less expensive, Schnitzer and AK Steel (NYSE: AKS ) have had difficulty holding their own.
For Steel Dynamics, though, identifying niche specialties has helped keep the company going strong. Just as Nucor (NYSE: NUE ) chose to acquire a specialty steel company to better serve customers needing infrastructure-related steel products, Steel Dynamics built a facility specifically to produce railroad track. With the railroad industry remaining strong in light of high energy prices driving demand for its fuel-efficient transportation, Steel Dynamics could continue to see revenue growth from that segment for a long time.
What Steel Dynamics needs in order to improve is for overall economic activity in the U.S. and throughout the world to improve. If all the stimulus measures that various central banks and governments have taken to drive further demand work, then Steel Dynamics has plenty of room to run toward perfection in the years ahead.
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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