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.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.6%||Fail|
|1-Year Revenue Growth > 12%||6.7%||Fail|
|Margins||Gross Margin > 35%||15.6%||Fail|
|Net Margin > 15%||2.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||49.8%||Pass|
|Current Ratio > 1.3||0.99||Fail|
|Opportunities||Return on Equity > 15%||4.9%||Fail|
|Valuation||Normalized P/E < 20||37.45||Fail|
|Dividends||Current Yield > 2%||2.6%||Pass|
|5-Year Dividend Growth > 10%||5.3%||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Alexander & Baldwin last year, the company has dropped a point. Slower growth shows exactly how challenging the economic environment has been for Alexander & Baldwin, whose shares have languished over the past year.
Alexander & Baldwin provides investors with a unique combination of businesses tied to the Hawaiian economy. The company owns income properties and is involved in agriculture on the islands, as well as having shipping operations that concentrate on moving goods between Hawaii and the U.S. mainland.
The shipping industry has seen some tough times lately, as dry-bulk shippers DryShips (Nasdaq: DRYS ) and Navios Maritime Holdings (NYSE: NM ) have seen their shares plunge as high debt levels and a glut in capacity have combined to send shipping rates down. Even though Diana Shipping (NYSE: DSX ) boasts lower debt and better returns on assets, it hasn't been able to avoid the downturn. Alexander & Baldwin, on the other hand, is largely protected by the Jones Act, which regulates shipping between Hawaii and the West Coast of the U.S. and keeps out foreign competition.
Still, last December, Alexander & Baldwin decided that the market wasn't valuing the sum of its parts correctly and therefore announced it would separate into two separate businesses. By spinning off its Matson shipping and logistics division into a separate entity, Alexander & Baldwin will focus on its real estate and agricultural businesses going forward. The split is expected to happen in the second half of this year.
Shareholders need to be aware that the surviving Alexander & Baldwin will look a lot different after the split. But the move could help both parts improve their lot by allowing them to focus on their respective strengths -- and potentially earn more recognition of those strengths from investors.
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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