Has Harley-Davidson Become the Perfect Stock?

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 Harley-Davidson (HOG -2.24%) 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 Harley-Davidson.

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Harley-Davidson last year, the company has gained another point after a nice three-point boost from 2010 to 2011. The stock has also inched higher, rising about 15% over the past year.

Harley-Davidson's stock has done an excellent job of recovering from the recession. But the motorcycle maker has had a tough time maintaining sales, as the high quality of its motorcycles and strong following among riders mean that bikes tend to last a long time.

For instance, in its most recent quarter, Harley managed to boost its profits by 30% based on reasonable demand in the U.S., Asia, and Latin America, but overall revenue came in below expectations. The company said the favorable weather during the first quarter pulled some sales forward, but Europe is also weighing on the company's results. That's not surprising, given how automakers Ford (F -0.41%) and General Motors (GM -0.47%) have faced huge headwinds on the continent as economic slowdowns sap consumer confidence.

Longer term, the big question is whether Harley can deal with an aging demographic to keep thriving. With interest in other motorized vehicles from Polaris Industries (PII -1.57%) and Arctic Cat (ACAT) on the rise, Harley has to compete for consumers' discretionary spending against more than just its fellow motorcycle makers.

If the revenue growth we've seen in the past year takes hold as a more lasting trend, then Harley should continue to see improvement. And if it can tackle those longer-term issues, then Harley could get even closer to perfection in the years ahead.

Keep searching
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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