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 Sun Hydraulics (Nasdaq: SNHY ) 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 Sun Hydraulics.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.2%||Fail|
|1-Year Revenue Growth > 12%||47.1%||Pass|
|Margins||Gross Margin > 35%||38.5%||Pass|
|Net Margin > 15%||18.9%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.1%||Pass|
|Current Ratio > 1.3||7.05||Pass|
|Opportunities||Return on Equity > 15%||29.1%||Pass|
|Valuation||Normalized P/E < 20||19.17||Pass|
|Dividends||Current Yield > 2%||1.8%||Fail|
|5-Year Dividend Growth > 10%||16%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With eight points, Sun Hydraulics has given investors a lot of bright days in the past several years. But the company hasn't reached perfection just yet.
Sun Hydraulics largely serves a niche industry: It makes screw-in hydraulic valves and manifolds for fluid power systems. That may sound almost too specialized to be a profitable business, but Sun has had no trouble on that score, with healthy returns on equity and good net margins. In fact, the company far outpaces industrial blue chip Precision Castparts (NYSE: PCP ) on a variety of metrics, including sales and dividend growth and operating margins.
But despite good results, Sun Hydraulics has investors worried about the future. Earlier this week, the company announced excellent third-quarter results but threw a wrench in the works in its guidance for the fourth quarter, with management calling for just a 5% growth rate in sales.
Whether you're talking about fluid systems specialists like Sun and Flowserve (NYSE: FLS ) or more general industrial equipment companies such as Manitowoc (NYSE: MTW ) and Caterpillar (NYSE: CAT ) , the key to success will be a recovery in business spending. Once the economy finally picks up some speed, Sun Hydraulics should enjoy a cyclical bounce -- and perhaps get enough lift to make it all the way to perfection.
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 the best investments from the rest.
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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."