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 Inergy
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 Inergy.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||8.6%||Fail|
|1-year revenue growth > 12%||22.2%||Pass|
|Margins||Gross margin > 35%||34.6%||Fail|
|Net margin > 15%||6.0%||Fail|
|Balance sheet||Debt to equity < 50%||159.9%||Fail|
|Current ratio > 1.3||1.39||Pass|
|Opportunities||Return on equity > 15%||4.1%||Fail|
|Valuation||Normalized P/E < 20||61.43||Fail|
|Dividends||Current yield > 2%||6.9%||Pass|
|5-year dividend growth > 10%||54.9%||Pass|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Inergy isn't exactly drilling up perfection with a score of just four. The energy company has burst onto the scene lately, but despite its strong dividends, Inergy has some shortcomings that potential investors should take into account before jumping in.
Inergy is a master limited partnership that specializes in propane delivery to residential consumers as well as a broad range of commercial and industrial customers. Like many MLPs, Inergy has a fairly high dividend yield, and its payouts bring some tax advantages to shareholders over comparable regular dividend stocks.
But Inergy isn't alone in the propane business. Competitors Suburban Propane
If its shares traded more cheaply, then Inergy might look a lot more like a perfect stock. But at its current valuation, Inergy has some more growth to do before it can approach perfection.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.