Has Hub Group Become the Perfect Stock?

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 Hub Group (HUBG 0.27%) 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 Hub Group.

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

Since we looked at Hub Group last year, the company has picked up a point. Unfortunately, that gain came from lower valuations that resulted in part from the stock's 10% drop over the past year.

Hub Group is an intermodal transportation company, which helps facilitate the movement of goods through a variety of different transport methods. Hub and rival J.B. Hunt (JBHT -1.64%) together control nearly half of the intermodal market, dominating many smaller players in a space where scale is a key advantage.

Yet one interesting phenomenon that has plagued the market lately is that transportation-related stocks haven't participated very strongly in the summer rally. For Hub, part of that comes from its second-quarter-earnings report, in which it missed estimates and cut guidance for the full year.

Most recently, things look like they may be getting better. J.B. Hunt reported a small miss on its earnings, but shares reacted positively to growth in operating revenue. Similarly, positive news from FedEx (FDX 0.31%) also buoyed the industry, and high fuel costs continue to support CSX (CSX 0.01%) and Union Pacific (UNP -0.30%) in their efforts to capture more trucking and intermodal business. For its part, Hub saw net income in its third quarter rise almost 14% versus the year-ago quarter and cited an 11% increase in intermodal revenue based on a 9% rise in volume.

For Hub Group to keep improving, it needs to make the most of multiple transportation options to sustain itself through a tough economic environment. When a faster pace of growth finally takes hold, Hub needs to be in position to take maximum advantage if it wants to reach toward 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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