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 Lockheed Martin
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 Lockheed Martin.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.9%||Fail|
|1-Year Revenue Growth > 12%||4.6%||Fail|
|Margins||Gross Margin > 35%||10.7%||Fail|
|Net Margin > 15%||6.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||239.1%||Fail|
|Current Ratio > 1.3||1.21||Fail|
|Opportunities||Return on Equity > 15%||82.2%||Pass|
|Valuation||Normalized P/E < 20||11.99||Pass|
|Dividends||Current Yield > 2%||4.8%||Pass|
|5-Year Dividend Growth > 10%||20.1%||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Lockheed Martin last year, the defense contractor has kept its four-point score. But even weaker growth and a worsening balance sheet raise some concerns for the company's future.
Companies throughout the defense sector have seen their stocks perform badly in light of anticipated cuts to the U.S. defense budget. With Lockheed having earned 84% of its revenue in 2010 from the U.S. government, the company is obviously vulnerable to spending cuts. With many of its competitors in the same boat -- Northrop Grumman
But Lockheed has gone beyond the U.S. to find success. Last month, the company announced a $7 billion sale of 42 F-35 stealth fighter jets to Japan, as the island nation seeks to boost its defense capability. Speculation that the Defense Department might allow F-35 sales to India as well could boost not only Lockheed but also F-35 subcontractors Northrop and United Technologies'
For Lockheed to get back on a growth trajectory, it needs a strong economy to help boost the health of the U.S. government's overall budget. Once worries about defense cuts are behind it, Lockheed has what it takes to get a lot closer to perfection. Furthermore, with Lockheed's big dividend yield that has grown quickly in recent years, shareholders have a lot to gain from owning the 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. The Motley Fool owns shares of Lockheed Martin, General Dynamics, and Northrop Grumman. 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.