Is Alexander & Baldwin the Perfect Stock?

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 Alexander & Baldwin (NYSE: ALEX  ) 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 Alexander & Baldwin.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 0.6% Fail
  1-Year Revenue Growth > 12% 17.8% Pass
Margins Gross Margin > 35% 16.2% Fail
  Net Margin > 15% 5.6% Fail
Balance Sheet Debt to Equity < 50% 46% Pass
  Current Ratio > 1.3 0.75 Fail
Opportunities Return on Equity > 15% 5.3% Fail
Valuation Normalized P/E < 20 41.12 Fail
Dividends Current Yield > 2% 2.3% Pass
  5-Year Dividend Growth > 10% 7% Fail
       
  Total Score   3 out of 10

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

Alexander & Baldwin's score of 3 doesn't make it look perfect. The conglomerate has attracted attention from a big-name activist investor, but it's unclear whether he'll be able to unlock value from its assets.

Alexander & Baldwin has an interesting mix of businesses under its umbrella. The Hawaii-based company owns about 88,000 acres of land in the state, mostly on the islands of Maui and Kauai. The land supports several uses, including the company's own sugar and coffee production, pasture, and watershed and conservation property; as well as commercial developments used for shopping malls and office space. The company also includes a shipping division with routes from Hawaii to the mainland U.S. as well as between China and Long Beach, California.

Shipping is a tough business, and foreign companies like Diana Shipping (NYSE: DSX  ) and DryShips (Nasdaq: DRYS  ) have suffered from ship oversupply and weak demand during the recession. But under an obscure U.S. law, Alexander & Baldwin is protected from foreign competition on its Hawaiian routes.

That may be what has attracted the attention of activist investor Bill Ackman, who recently teamed up with another hedge fund to take a stake of nearly 10% in the company. Given what happened with Florida land company St. Joe (NYSE: JOE  ) , which was the subject of a dogfight between well-known investors David Einhorn and Bruce Berkowitz, shareholders are hoping that the company draws even more interest in the future.

After the big run-up in shares, Alexander & Baldwin looks awfully expensive compared to its rather modest fundamentals. But if Ackman can unlock value in the company, shareholders might well see it as the perfect stock in the coming months.

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.

Click here to add Alexander & Baldwin to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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