Is Otter Tail the Perfect Stock?

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 Otter Tail (Nasdaq: OTTR  ) 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 Otter Tail.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

2.7%

fail

 

1-Year Revenue Growth > 12%

(13.5%)

fail

Margins

Gross Margin > 35%

25.7%

fail

 

Net Margin > 15%

0.9%

fail

Balance Sheet

Debt to Equity < 50%

76.9%

fail

 

Current Ratio > 1.3

1.62

pass

Opportunities

Return on Equity > 15%

1.4%

fail

Valuation

Normalized P/E < 20

48.4

fail

Dividends

Current Yield > 2%

5.9%

pass

 

5-Year Dividend Growth > 10%

1.4%

fail

       
 

Total Score

 

2 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Forget about perfect; a score of 2 lands Otter Tail near the bottom of the heap. But that doesn't mean the stock is doomed. Although many think of it as an electric utility, Otter Tail is actually a well-diversified company with a host of different business segments ranging from wind energy to recreational boating supplies.

Unfortunately, Otter Tail's diversified businesses haven't helped it lately. In its most recent quarter, the company reported losses tied to its boating business and cut guidance, and earlier this year, the company filed to offer as much as $75 million in new stock, raising concerns about potential dilution.

Keep in mind, though, that few utilities score well by these measures. Duke Energy (NYSE: DUK  ) and Southern Co. (NYSE: SO  ) have similarly low growth rates and fairly high debt levels. Yet despite the fact that Otter Tail is no more a pure play on wind energy than megaconglomerate General Electric (NYSE: GE  ) , a rebound in interest in renewables could push both the stock and its underlying fundamentals back upward.

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.

The Motley Fool is recommending 50 stocks in 50 days for its new "11 O'Clock Stock" series. For more information, click here. Then come back to Fool.com every single weekday at 11 a.m. ET for a brand-new pick!

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. 

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Otter Tail is a Motley Fool Hidden Gems selection. Duke Energy and Southern are Motley Fool Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1311563, ~/Articles/ArticleHandler.aspx, 9/30/2014 8:11:28 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement