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 Westport Innovations
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 Westport Innovations.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||27%||Pass|
|1-Year Revenue Growth > 12%||21.7%||Pass|
|Margins||Gross Margin > 35%||38.6%||Pass|
|Net Margin > 15%||(28.6%)||Fail|
|Balance Sheet||Debt to Equity < 50%||12.9%||Pass|
|Current Ratio > 1.3||4.33||Pass|
|Opportunities||Return on Equity > 15%||(28.9%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.
Westport Innovations manages a mid-range score of 5. As the world struggles with high oil prices, Westport is poised to help shift some oil demand toward plentiful natural gas.
With increasing supplies of natural gas from shale formations and other sources, the energy markets have moved in two directions. While oil prices have skyrocketed, natural gas prices are still relatively low. That puts Westport, which has developed technology to help diesel engines run on natural gas, in an excellent position to capitalize on the supply and demand characteristics of the energy market in the years to come. The company is collaborating with several engine manufacturing partners worldwide, including Cummins
The challenge for every clean energy company, including both Westport and peers like gas-infrastructure play Clean Energy Fuels
Westport isn't profitable now, and until it gets a national commitment to natural gas, the company won't be able to reach its full potential. If the U.S. realizes that home-drilled natural gas is a better, safer alternative to foreign dependence on oil, however, Westport could quickly become a very profitable investment for shareholders.
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 buying shares of Westport Innovations. 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.