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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Tata Motors (NYSE: TTM ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Tata.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||36.4%||pass|
|1-Year Revenue Growth > 12%||56.2%||pass|
|Margins||Gross Margin > 35%||36.8%||pass|
|Net Margin > 15%||6.4%||fail|
|Balance Sheet||Debt to Equity < 50%||293.2%||fail|
|Current Ratio > 1.3||1.12||fail|
|Opportunities||Return on Equity > 15%||69.1%||pass|
|Valuation||Normalized P/E < 20||21.40||fail|
|Dividends||Current Yield > 2%||1.2%||fail|
|5-Year Dividend Growth > 10%||8.4%||fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 4, Tata has room for improvement. But the Indian carmaker has a lot of potential, especially given its prominent position in one of the world's biggest emerging markets.
Lately, plenty of news in the domestic auto industry has overshadowed Tata's accomplishments. General Motors (NYSE: GM ) successfully pulled off one of the biggest IPOs in history, raising over $22 billion with its common and preferred stock offering in November, much of which went to pay back taxpayers for bailout funds. More recently, both GM and Ford (NYSE: F ) posted good sales figures for November, leaving struggling Toyota (NYSE: TM ) in the dust.
But discounting Tata's role in the industry is a mistake that could cost you. Twice in the past month, shares have made big jumps. Its latest earnings report showed sales spike 37% and profits rise tenfold. More recently, it projected that its light commercial truck business could see more than 50% growth from last year's levels. Combine that success with its role as an innovator -- it builds the Nano, which at $2,500 is the world's cheapest car -- and you can see that Tata is on the move.
High debt levels and a subpar dividend yield are marks against the stock, but as a play on continuing growth in emerging market economies, Tata could take you places.
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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