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 Consolidated Edison (NYSE: ED ) 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 Consolidated Edison.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.1%||Fail|
|1-Year Revenue Growth > 12%||(5.6%)||Fail|
|Margins||Gross Margin > 35%||40.1%||Pass|
|Net Margin > 15%||8.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||102.6%||Fail|
|Current Ratio > 1.3||0.94||Fail|
|Opportunities||Return on Equity > 15%||9.2%||Fail|
|Valuation||Normalized P/E < 20||17.01||Pass|
|Dividends||Current Yield > 2%||4.1%||Pass|
|5-Year Dividend Growth > 10%||0.9%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Consolidated Edison last year, the company has held onto its third point. But the stock hasn't gained much ground, posting a rise of about 5% in the past year.
With a customer base of millions of consumers in the greater New York City metropolitan area, Consolidated Edison never needs to worry about a lack of demand. Delivering electricity, gas, and steam, ConEd has benefited from New York's rising population and constant economic activity over the years.
But perhaps because of investor interest in dividend-paying stocks, ConEd and many of its utility peers have seen huge share price gains in recent years. Duke Energy (NYSE: DUK ) , Southern Company (NYSE: SO ) , and Dominion Resources (NYSE: D ) all gained 20% or more during 2011, but they haven't been able to make much headway in this year's slow environment for utility stocks. That has some worried about a dividend bubble in ConEd and other similar stocks that could result in share price losses in the near future.
Still, ConEd has weathered storms longer than most utilities. As the only utility stock among the Dividend Aristocrats, ConEd can point to nearly four decades of annual dividend increases. Admittedly, recent payout boosts have been insignificant, as the stock's five-year dividend growth rate of less than 1% shows. But it still represents positive progress during a period when many companies struggled even to maintain payouts, let alone raise them.
For ConEd to improve, it needs to find ways to build up revenue even in a relatively slow economic environment. When the recovery comes in earnest, ConEd should be in a position to profit from it.
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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