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 Autoliv (NYSE: ALV ) 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 Autoliv.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.3%||Fail|
|1-Year Revenue Growth > 12%||19.9%||Pass|
|Margins||Gross Margin > 35%||21.6%||Fail|
|Net Margin > 15%||8.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||21.3%||Pass|
|Current Ratio > 1.3||1.44||Pass|
|Opportunities||Return on Equity > 15%||22.0%||Pass|
|Valuation||Normalized P/E < 20||8.72||Pass|
|Dividends||Current Yield > 2%||3.7%||Pass|
|5-Year Dividend Growth > 10%||3.3%||Fail|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, Autoliv is keeping investors moving safely. The manufacturer has a corner on one of the most important components of the automotive industry.
Autoliv makes seat belts and airbags for a huge portion of the auto industry. As the company states, for every vehicle produced around the world, Autoliv produced two seatbelts and 1.2 airbags. Its customers include Ford (NYSE: F ) and General Motors (NYSE: GM ) , as well as foreign automakers including Audi, BMW, Nissan, and Volkswagen.
Unfortunately, Autoliv's success has sparked concern among regulators. In July, the company announced that ongoing antitrust investigations in the U.S. and Europe could have an impact on operating results and cash flows. Since then, and in part because of the financial crisis in Europe, Autoliv shares have fallen sharply.
The company isn't without competition, though. TRW Automotive (NYSE: TRW ) makes seat belts, airbags, and other restraint systems, along with a bunch of other auto-related parts. Moreover, it has better returns on equity and an even cheaper valuation than Autoliv, although it lacks Autoliv's healthy dividend.
Autoliv needs to get out from under its antitrust investigation and hope that the auto industry can continue to recover. If things go well for the company, Autoliv could get even closer to perfection in the near future.
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.