Has Hub Group 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 Hub Group (Nasdaq: HUBG  ) 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 Hub Group.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

13.5%

Fail

 

1-Year Revenue Growth > 12%

24.6%

Pass

Margins

Gross Margin > 35%

11.2%

Fail

 

Net Margin > 15%

2.1%

Fail

Balance Sheet

Debt to Equity < 50%

4.9%

Pass

 

Current Ratio > 1.3

1.55

Pass

Opportunities

Return on Equity > 15%

14.5%

Fail

Valuation

Normalized P/E < 20

16.96

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 Hub Group last year, the company has picked up a point. Unfortunately, that gain came from lower valuations that resulted in part from the stock's 10% drop over the past year.

Hub Group is an intermodal transportation company, which helps facilitate the movement of goods through a variety of different transport methods. Hub and rival J.B. Hunt (Nasdaq: JBHT  ) together control nearly half of the intermodal market, dominating many smaller players in a space where scale is a key advantage.

Yet one interesting phenomenon that has plagued the market lately is that transportation-related stocks haven't participated very strongly in the summer rally. For Hub, part of that comes from its second-quarter-earnings report, in which it missed estimates and cut guidance for the full year.

Most recently, things look like they may be getting better. J.B. Hunt reported a small miss on its earnings, but shares reacted positively to growth in operating revenue. Similarly, positive news from FedEx (NYSE: FDX  ) also buoyed the industry, and high fuel costs continue to support CSX (NYSE: CSX  ) and Union Pacific (NYSE: UNP  ) in their efforts to capture more trucking and intermodal business. For its part, Hub saw net income in its third quarter rise almost 14% versus the year-ago quarter and cited an 11% increase in intermodal revenue based on a 9% rise in volume.

For Hub Group to keep improving, it needs to make the most of multiple transportation options to sustain itself through a tough economic environment. When a faster pace of growth finally takes hold, Hub needs to be in position to take maximum advantage if it wants to reach toward perfection.

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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Click here to add Hub Group to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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