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 Polypore International (NYSE: PPO ) 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 Polypore International.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.8%||Fail|
|1-Year Revenue Growth > 12%||14.3%||Pass|
|Margins||Gross Margin > 35%||41.8%||Pass|
|Net Margin > 15%||13.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||133.6%||Fail|
|Current Ratio > 1.3||3.52||Pass|
|Opportunities||Return on Equity > 15%||20.8%||Pass|
|Valuation||Normalized P/E < 20||18.53||Pass|
|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 Polypore International last year, the company has boosted its score by a point. But the stock hasn't shared that success, with the share price having fallen almost 50% in the past year.
Polypore's business falls into two main segments: It makes a key component for both lead-acid and lithium batteries, and it makes membranes for applications such as filtering and oxygenating blood. With the big rise in electric vehicles, not only from specialty carmaker Tesla Motors (Nasdaq: TSLA ) but also mainstream producers General Motors (NYSE: GM ) and Ford (NYSE: F ) , lithium in particular has become a huge business with big potential.
But Polypore got some bad news earlier this year. South Korean LG Chem, which supplies batteries for General Motors and its Chevy Volt, decided to set up its own in-house production for lithium batteries. It's unclear how much of an impact this will have on Polypore, but investors didn't wait, selling off shares.
Going forward, though, the key will be how quickly consumers start gravitating toward electric vehicles. Government grants helped get the industry's wheels turning, but at some point, demand must rise in order to keep the electric vehicle movement from coming to a halt. Yet Polypore's most recent quarterly results showed falling sales in both the battery and separation media segments.
For Polypore to improve, it needs to see more car buyers moving toward electric vehicles while still promoting the other side of its business. If it can do that, then Polypore has plenty of potential to move 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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