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 Emerson Electric
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 Emerson Electric.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 3.2% | Fail |
| 1-Year Revenue Growth > 12% | 10.3% | Fail | |
| Margins | Gross Margin > 35% | 39.4% | Pass |
| Net Margin > 15% | 9.9% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 54.4% | Fail |
| Current Ratio > 1.3 | 1.39 | Pass | |
| Opportunities | Return on Equity > 15% | 23.2% | Pass |
| Valuation | Normalized P/E < 20 | 17.47 | Pass |
| Dividends | Current Yield > 2% | 3.1% | Pass |
| 5-Year Dividend Growth > 10% | 9.1% | Fail | |
| Total Score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Emerson Electric last year, the company has maintained its five-point score. The stock, however, has languished behind the overall market even in a fairly good environment for utility stocks generally.
Emerson makes technology that helps companies cut back on their power usage and boost their energy efficiency. Emerson has a number of high-profile companies on its customer list, including Apple
Emerson had a tough quarter late last year, though. Flooding in Thailand disrupted its supply chain, forcing it to delay production of various types of electronics. That sent net income down 23%, and earnings missed expectations. Moreover, now that General Electric
Nevertheless, Emerson has a lot of promise, with a strong dividend yield and reasonable valuation. If energy prices stay high, then the services and products that Emerson provides will hold their value -- and the stock should rebound from its recent weakness.
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.
Emerson Electric may not be a perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Emerson Electric to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
