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 AeroVironment (Nasdaq: AVAV ) 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 AeroVironment.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||15.8%||Pass|
|1-Year Revenue Growth > 12%||12.1%||Pass|
|Margins||Gross Margin > 35%||40.9%||Pass|
|Net Margin > 15%||9.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||6.62||Pass|
|Opportunities||Return on Equity > 15%||11.6%||Fail|
|Valuation||Normalized P/E < 20||20.70||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at AeroVironment last year, the company has kept its five-point score. But given the considerable headwinds in the defense industry lately, that's not such a bad performance.
The U.S. defense budget has been on the chopping block for quite a while now, and AeroVironment is starting to feel the effects. One of its biggest military programs involves its Wasp and Global Observer unmanned aerial vehicles, but that division suffered a 20% revenue drop in its most recent quarter. Although unmanned aircraft programs could be a way for the military to cut costs going forward and aren't seen as a major target for budget reductions, AeroVironment has to compete against the much larger Boeing (NYSE: BA ) and Lockheed Martin (NYSE: LMT ) in the space. Given the pressure that those companies are under, they'll fight AeroVironment hard to keep their foot in the door.
Meanwhile, the other core area in which AeroVironment is seeking to grow is in electric vehicles, where it hopes to provide home charging stations for electric-car owners. Although sales jumped 16% in its most recent quarter, AeroVironment isn't seeing the huge growth it had hoped to get from the industry. Moreover, Siemens (NYSE: SI ) and General Electric (NYSE: GE ) are also looking to expand their renewable-energy focus to include electric chargers, which could again pose a difficult competitive threat.
One source of respite may come from a possible takeover bid. Back in February, a Wall Street analyst named Boeing as a possible suitor for AeroVironment, citing strength in funding for UAVs. Similarly, either GE or Siemens would have the capacity to place a bid to bolster its presence in the car-charging market.
For AeroVironment to improve, it needs to emphasize its value as a niche player in both of its key industries. If it can do that, it should be able to retain military funding and continue to grow -- at least until a larger competitor decides it wants to buy the company out.
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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