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 Hollysys (Nasdaq: HOLI ) 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 Hollysys.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||26.7%||Pass|
|1-Year Revenue Growth > 12%||31.2%||Pass|
|Margins||Gross Margin > 35%||36.3%||Pass|
|Net Margin > 15%||16.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||13.4%||Pass|
|Current Ratio > 1.3||2.35||Pass|
|Opportunities||Return on Equity > 15%||17.7%||Pass|
|Valuation||Normalized P/E < 20||17.08||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With eight points, Hollysys performs very well on our 10-point scale. But for a dividend, the company could be a perfect stock, and it's in an industry with plenty of future potential.
Hollysys makes automated technology for a number of applications in China and southeastern Asia, including subway and railway control mechanisms as well as safety control systems in nuclear power plants. With trains representing an essential component of transit in Asia, the company is well-placed to get its share of business there, especially as China builds out a huge network for its high-speed rail system. In particular, it could pose a hurdle to Rockwell Automation (NYSE: ROK ) and Emerson Electric (NYSE: EMR ) , both of which are looking for ways to penetrate the Chinese market and which would be clear competitors to Hollysys.
One question for Hollysys is whether it could see business from U.S. adoption of high-speed rail. General Electric (NYSE: GE ) and Siemens (NYSE: SI ) have had some interest in proposals being discussed for areas including California, Texas, and the NYC-Washington corridor. But some see the federal funding for such projects as a waste of resources, and even if they go forward, Hollysys might have a tough time getting itself included in the projects.
Earlier this week, Hollysys announced that Hong Kong metro-transit operator MTR had awarded it a contract for high-speed rail signaling systems along the rail link between Guangzhou, Shenzhen, and Hong Kong. Although the $63 million contract is substantial, the real value in the project may be future sales it could get if it performs well.
For Hollysys to achieve perfection, it needs to keep growing. At this point, diverting cash to a dividend would be foolhardy, as growth is more important. In the long run, though, if Hollysys makes a name for itself, it could get those final two points within the next several years.
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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