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 AeroVironment
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 AeroVironment.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 16.3% | Pass |
| 1-Year Revenue Growth > 12% | 26.3% | Pass | |
| Margins | Gross Margin > 35% | 38.8% | Pass |
| Net Margin > 15% | 8.3% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 0.0% | Pass |
| Current Ratio > 1.3 | 5.85 | Pass | |
| Opportunities | Return on Equity > 15% | 10.4% | Fail |
| Valuation | Normalized P/E < 20 | 32.76 | Fail |
| Dividends | Current Yield > 2% | 0.0% | Fail |
| 5-Year Dividend Growth > 10% | 0.0% | Fail | |
| Total Score | 5 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
AeroVironment doesn't fly high with a score of 5. The company is still on a growth trajectory, but headwinds could keep it from getting closer to perfection in the years ahead.
AeroVironment combines two interesting businesses in a single company. On one hand, it builds unmanned aircraft systems that the U.S. military is interested in. On the other, the company seeks to provide home charging stations for electric vehicles. With car companies like Tesla
So far, the company has done quite well, posting strong earnings growth and expecting double-digit growth in the coming year. But the company will face challenges along the way. In the electric charging market, big companies like General Electric
Moreover, AeroVironment suffered a setback last week when one of its unmanned aircraft crashed during a test flight. Competing against defense giants Boeing
AeroVironment isn't for the faint of heart, but the company has a lot of potential. It's not the perfect stock right now, but the future could have it soaring above the competition if things play out well.
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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