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 Alpha Natural Resources
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 Alpha Natural Resources.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||25.2%||Pass|
|1-Year Revenue Growth > 12%||58.4%||Pass|
|Margins||Gross Margin > 35%||23.9%||Fail|
|Net Margin > 15%||1.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||36.2%||Pass|
|Current Ratio > 1.3||1.53||Pass|
|Opportunities||Return on Equity > 15%||1.4%||Fail|
|Valuation||Normalized P/E < 20||12.10||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With five points, Alpha Natural Resources finishes in the middle of the pack. Although the company has seen impressive sales growth, don't let that fool you: Its shares have suffered throughout the year.
Alpha produces coal, with an emphasis on the metallurgical coal that steelmakers use in their production process. Unfortunately, with emerging-market growth beginning to slow, steel producers like ArcelorMittal
Alpha's big growth driver in the past year was its controversial buyout of Massey Energy, which had a major mine disaster shortly before the takeover was first announced. The move set off a string of M&A activity in the sector, with Arch Coal
Lately, worries in Europe have held Alpha shares captive. The stock soared two weeks ago on hopes that Europe could avoid recession. But more recently, the company gave back some of those gains on an analyst downgrade and renewed pessimism about Europe.
For Alpha to continue improving, it needs to put Massey's troubles behind it and start executing on the business front. If it can succeed in doing that, Alpha should be able to get closer to perfection in the years ahead.
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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