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 Toyota Motor
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 Toyota.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (0.5%) | Fail |
| 1-Year Revenue Growth > 12% | 14.1% | Pass | |
| Margins | Gross Margin > 35% | 13.0% | Fail |
| Net Margin > 15% | 2.5% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 113.4% | Fail |
| Current Ratio > 1.3 | 1.18 | Fail | |
| Opportunities | Return on Equity > 15% | 5.4% | Fail |
| Valuation | Normalized P/E < 20 | 18.14 | Pass |
| Dividends | Current Yield > 2% | 1.4% | Fail |
| 5-Year Dividend Growth > 10% | 2.4% | Fail | |
| Total Score | 2 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Toyota only manages a score of 2. Even before the disaster in Japan, the automaker wasn't firing on all cylinders, and now it faces an even bigger challenge.
Until recently, Toyota was seen as the pinnacle of automotive quality. But the company has spent more than a year on the defensive, as it mishandled accidents linked to unintended acceleration that eventually forced it to recall millions of its vehicles and gave it a public relations nightmare.
Moreover, currency problems have hamstrung the company. Unlike Honda
Now, of course, the earthquake and tsunami in Japan have raised new concerns about the automaker. With many of its Japanese factories closed or below full capacity, the company is having trouble keeping its North American factories equipped with parts for production.
The biggest thing going for potential investors is that shares have fallen in the aftermath of the earthquake. But with so much uncertainty in so many different areas, it's hard to recommend the stock even as a beaten-down value play. For now, Toyota needs to settle in and revamp before it can hope to become a perfect stock.
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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