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 (NYSE: EMR) 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 Emerson Electric.


What We Want to See


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 (Nasdaq: AAPL). It also won a contract from Quanta Services (NYSE: PWR) to supply power inverters for a huge photovoltaic power generation facility in California. That project started generating power late last year for NRG Energy's (NYSE: NRG) solar division, which is handling commercial operations alongside partner Eurus Energy America.

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 (NYSE: GE) has recovered from its finance-driven disaster during the financial crisis, it will be an increasingly tough competitor in the energy efficiency space.

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.

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