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 SinoCoking and Coke Chemical
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 SinoCoking and Coke Chemical.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 43.2% | Pass |
| 1-Year Revenue Growth > 12% | (4.9%) | Fail | |
| Margins | Gross Margin > 35% | 34.2% | Fail |
| Net Margin > 15% | 149.0% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 16.2% | Pass |
| Current Ratio > 1.3 | 3.32 | Pass | |
| Opportunities | Return on Equity > 15% | 197.3% | Pass |
| Valuation | Normalized P/E < 20 | 9.55 | Pass |
| Dividends | Current Yield > 2% | 0.0% | Fail |
| 5-Year Dividend Growth > 10% | 0.0% | Fail | |
| Total Score | 6 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With six points, SinoCoking and Coke Chemical looks reasonably strong. But the Chinese coal and coke producer has had its shares painted with the same brush as some competitors that have faced uncomfortable allegations recently.
At first glance, you'd think that SinoCoking was in exactly the right place at the right time. With demand for coal in China having remained strong throughout the global slowdown, SinoCoking should be enjoying strong industry tailwinds. Certainly, the company's financial results support that theory, although a small drop in revenue over the past year raises some concerns.
The biggest problem, though, is an overall lack of confidence among the small players in the industry. Puda Coal
The major question for investors right now is whether every single Chinese small-cap is too good to be true. It's easy to play the coal trend through global giants BHP Billiton
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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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.
