Is General Steel the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if General Steel Holdings (NYSE: GSI) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

• 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
• Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
• Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
• Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
• Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 General Steel.

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; General Steel had negative earnings during the period. Total score = number of passes.

A score of 2 leaves a lot to be desired for General Steel. But these metrics aren't entirely fair. Making steel is a capital-intensive, low-margin business, and even the much more established US Steel (NYSE: X) has a fairly high debt load and low margins. Moreover, much of General Steel's debt is short-term, which it's using to acquire state-owned Chinese steel companies at discount prices. If those investments succeed, then the company could reverse its debt problems quickly.

In the long run, General Steel won't sustain its fast growth rate. Mature competitors Nucor (NYSE: NUE) and ArcelorMittal (NYSE: MT) have much slower growth, and after its acquisition phase ends, General Steel will settle down as well. However, future investors can probably expect dividend payments to begin once the company shores up its shaky balance sheet. General Steel may never be perfect, but it has the potential to climb a lot further than it has so far.

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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