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 and then decide whether Nordic American Tankers
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 Nordic American Tankers.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (5.5%) | Fail |
| 1-Year Revenue Growth > 12% | (2.4%) | Fail | |
| Margins | Gross Margin > 35% | 56.5% | Pass |
| Net Margin > 15% | (15.7%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 8.2% | Pass |
| Current Ratio > 1.3 | 6.15 | Pass | |
| Opportunities | Return on Equity > 15% | (1.7%) | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current Yield > 2% | 5.9% | Pass |
| 5-Year Dividend Growth > 10% | (15.9%) | Fail | |
| Total Score | 4 out of 9 |
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful because of negative earnings. Total score = number of passes.
Nordic American Tankers isn't loading up on profits with a score of only 4 points. The company pays an impressive dividend, but when you look beneath the surface, you'll discover something a lot less remarkable.
Nordic American ships crude oil internationally with its fleet of tankers. You might think that with energy prices at high levels, this would be a great time for the company. But unlike the situation three years ago, when oil buyers used tankers for storage purposes, a glut of tankers has resulted in lower shipping rates, hurting not only Nordic American but also competitors Kirby
That long trend may be in the process of reversing itself, though. Between the Japanese disaster and the Libyan uprising, reshuffling of supply lines to replace lost capacity should benefit both long-range shippers like Nordic American and Teekay Tankers
Meanwhile, many investors are drawn to Nordic American because of its dividend. But the company's payout isn't backed up by net income or free cash flow. To support the dividend, Nordic American had to issue new shares. That suggests that the dividend is sustainable only as long as investors are willing to accept dilutive secondary offerings.
With falling revenue, net losses, and a shaky dividend, Nordic American clearly isn't perfect. But if the shipping industry recovers, the company is in a prime position to take advantage.
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.
