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 Terex (NYSE: TEX) fits the bill.

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 Terex.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (2.4%) Fail
  1-Year Revenue Growth > 12% 49.2% Pass
Margins Gross Margin > 35% 16.7% Fail
  Net Margin > 15% 0.8% Fail
Balance Sheet Debt to Equity < 50% 114.9% Fail
  Current Ratio > 1.3 2.17 Pass
Opportunities Return on Equity > 15% 2.3% Fail
Valuation Normalized P/E < 20 34.51 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Terex last year, the company hasn't been able to improve on its two-point score. But even though the company's shares are down 40% over the past year, the construction equipment maker has returned to profitability after a long stretch of losses during the recession.

As a maker of construction and mining equipment, Terex has reaped long-term benefits from the rise of emerging markets around the world. With Terex having acquired European-based Demag Cranes last year, the company has greatly boosted its revenue and will add the port equipment business to its product lines.

There's no lack of competition in the equipment space, however. Like Terex, Caterpillar (NYSE: CAT) has seen its U.S. sales pick up recently, and it's also working hard to become the leader in the Chinese market even as that country's economy slows down. Manitowoc (NYSE: MTW) is expanding its crane business into Brazil, posing another obstacle to Terex's growth prospects. And on the mining side, Joy Global (NYSE: JOY) has struggled alongside Terex as mining activity faced falling prices for many key metals.

Still, Terex has seen better numbers recently. A lot of that comes from higher demand by customers seeking to replace aging machinery. The company is hiring hundreds of new employees to meet that demand, suggesting that Terex thinks the expansion could last a while.

For Terex to improve, it needs to build earnings to the point at which its P/E ratio matches up more closely with equipment giants Caterpillar and Deere (NYSE: DE). Moreover, cutting debt should be a big priority. But as long as economic activity continues, Terex will stay in the hunt to get a lot closer to perfection.

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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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.