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 Alaska Air
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 Alaska Air.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.3%||Fail|
|1-Year Revenue Growth > 12%||13.8%||Pass|
|Margins||Gross Margin > 35%||30.5%||Fail|
|Net Margin > 15%||8.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||123.5%||Fail|
|Current Ratio > 1.3||1.08||Fail|
|Opportunities||Return on Equity > 15%||31.1%||Pass|
|Valuation||Normalized P/E < 20||7.61||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just three points, Alaska Air isn't flying very high. Given the troubles that most airlines face, however, Alaska Air has held up reasonably well lately.
For years, the airline industry has gone through episode after episode of turmoil. During 2007 and 2008, soaring fuel costs threatened the whole industry's viability.
Lately, though, even fee income hasn't been enough to help the airlines. Because of the latest cycle of high oil prices, JetBlue
Yet Alaska Air followed a playbook that longtime industry darling Southwest Airlines
Alaska still suffers from the highly capital-intensive nature of airlines. But with net margins that put the rest of the industry to shame, Alaska may just be the closest to perfection you'll ever find from an airline stock.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended Southwest Airlines. 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.