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 (LMT 0.64%) 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 Lockheed Martin.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Growth |
5-year annual revenue growth > 15% |
2.4% |
Fail |
|
1-year revenue growth > 12% |
1.5% |
Fail | |
|
Margins |
Gross margin > 35% |
8.9% |
Fail |
|
Net margin > 15% |
5.8% |
Fail | |
|
Balance sheet |
Debt to equity < 50% |
NM |
NM |
|
Current ratio > 1.3 |
1.14 |
Fail | |
|
Opportunities |
Return on equity > 15% |
NM |
NM |
|
Valuation |
Normalized P/E < 20 |
11.38 |
Pass |
|
Dividends |
Current yield > 2% |
5.2% |
Pass |
|
5-year dividend growth > 10% |
22.3% |
Pass | |
|
Total score |
3 out of 8 |
Source: S&P Capital IQ. NM = not meaningful due to negligible shareholder equity. Total score = number of passes.
Since we looked at Lockheed Martin last year, the company has effectively stayed in much the same condition it has for the past two years, as the one-point drop is due to the company's shareholder equity having become insignificant. The stock has fared reasonably well, gaining 10% over the past year.
Lockheed has had to deal with threats of defense cuts in the U.S. for a long time. In particular, its F-35 fighter jet program has drawn plenty of criticism. Despite the fact that the company successfully concluded negotiations to build more than 30 fighters for the Air Force, Navy, and Marines, Lockheed is getting hints that the F-35 may not be the trillion-dollar producer over the next half century that it hoped for, and that rivals Northrop Grumman (NOC 0.44%) or even Textron (TXT 0.86%) could take Lockheed's place in the next generation of U.S. military fighters.
Lockheed is also facing international pressure on the F-35, as well. Last week, the Canadian government reportedly asked Lockheed, Boeing (BA 1.95%), and three other aircraft manufacturers seeking bids for an alternative to the F-35, in light of the fact that Canada's anticipated cost to obtain and maintain the fighters throughout their expected lifespan has nearly doubled from original estimates.
Worst of all, earlier this week, an F-35B had propulsion-system problems that forced a pilot to end a test run of the aircraft. With United Technologies (UTX 0.46%) having made the component, Lockheed needs to take steps to make sure it avoids the same fate that has recently plagued Boeing's 787 Dreamliner.
For Lockheed to improve, it needs to find ways to get its balance sheet in better order. Until business picks up, though, it's hard to see Lockheed getting much 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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