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 Titan Machinery (Nasdaq: TITN) 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 Titan Machinery.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 41.5% Pass
  1-Year Revenue Growth > 12% 42.3% Pass
Margins Gross Margin > 35% 16.5% Fail
  Net Margin > 15% 2.3% Fail
Balance Sheet Debt to Equity < 50% 243.3% Fail
  Current Ratio > 1.3 1.46 Pass
Opportunities Return on Equity > 15% 12.9% Fail
Valuation Normalized P/E < 20 8.96 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   4 out of 10

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

Since we looked at Titan Machinery last year, the company has kept its four-point score. But the equipment maker has had a tough summer as fears about the strength of the overall economy have weighed on its industry.

As a retailer primarily of agricultural equipment, Titan has benefited greatly from high crop prices and generally excellent results from farmers, especially in the U.S. market. In order to make the most money, farmers rely on top equipment, and that's driven revenue growth for Titan for several years now. Although agriculture equipment makes up about 85% of its total revenue, Titan also does business in the construction equipment segment as well.

Yet success in the industry has made competition ever fiercer. Deere (NYSE: DE) boasts some of the most technologically advanced farming equipment in the world, giving it the leadership position in the industry. AGCO (NYSE: AGCO) has also seen impressive growth, although not at the pace that Titan has managed. The nation's huge drought has also hurt Titan, as the stock dropped more than 20% after its fiscal-second-quarter results came in far worse than expected, forcing the company to reduce guidance for the year.

Titan has an ace in the hole, though: the prospect for international expansion. Titan has only recently looked abroad for growth, having bought Romania's AgroExpert just last December. Yet with construction equipment makers Caterpillar (NYSE: CAT) and Manitowoc (NYSE: MTW) aggressively seeking to capture opportunities in a wide array of international markets, Titan is smart to follow suit.

For Titan to improve, it needs to translate more of its revenue growth into bottom line profits. If it can manage to do so, then Titan is in a good position to get closer to perfection in the years ahead.

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.

Titan has potential, but Caterpillar is still a giant in big machinery, with its focus on construction and mining. Is the stock's recent drop a sign of trouble to come or a great buying opportunity? Get some valuable insight on the machinery giant from the Fool's premium research report on Caterpillar, in which our top analysts look at the company's challenges and opportunities going forward.

Click here to add Titan Machinery to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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.