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 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.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||(11.9%)||Fail|
|1-year revenue growth > 12%||(9.5%)||Fail|
|Margins||Gross margin > 35%||26.4%||Fail|
|Net margin > 15%||(74.9%)||Fail|
|Balance sheet||Debt to equity < 50%||27.2%||Pass|
|Current ratio > 1.3||13.17||Pass|
|Opportunities||Return on equity > 15%||(7.9%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current yield > 2%||9.4%||Pass|
|5-year dividend growth > 10%||(28%)||Fail|
|Total score||3 out of 9|
Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.
Since we looked at Nordic American Tankers last year, the company has lost a point. The nightmare continues for the shipping industry, with the stock having plunged another 40% in the past year as conditions fail to improve.
Tanker shipping companies are suffering the consequences of a boom from several years ago that lifted Nordic American and peers Frontline
But the financial crisis and ensuing commodities bust took the wind out of the industry, leaving those brand new ships without the demand companies had expected. That sent rates through the floor and has caused big losses for Nordic American and most of its peers, although Ship Finance has managed to stay profitable.
Even worse, recent tensions in Iran have brought on EU sanctions against the country, forcing many tanker companies to stop shipping oil from Iran. With no end in sight to the glut of vessels, which rivals what DryShips
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 in this article. 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.