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 Otter Tail
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 Otter Tail.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.9%||Fail|
|1-Year Revenue Growth > 12%||21.1%||Pass|
|Margins||Gross Margin > 35%||24.6%||Fail|
|Net Margin > 15%||2.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||72.4%||Fail|
|Current Ratio > 1.3||1.72||Pass|
|Opportunities||Return on Equity > 15%||3.6%||Fail|
|Valuation||Normalized P/E < 20||31.84||Fail|
|Dividends||Current Yield > 2%||6.2%||Pass|
|5-Year Dividend Growth > 10%||1%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
When we looked at Otter Tail last year, it had an even lower score of two, so the company has made a little progress since then. Strong revenue growth this year gave it the extra point, but Otter Tail still has a ways to go before it can reach perfection.
Otter Tail combines some interesting businesses into a single entity. On one hand, the company is best known for its electric utility business, so when you look at Otter Tail's fairly sizable debt load and hefty dividend yield, you're reminded of peers like Duke Energy
But the electric business only makes up about a quarter of Otter Tail's revenue. Its other businesses include a hodgepodge of industries, from wind energy and plastics to manufacturing and construction. Among its segments, all except its health services business have seen increasing revenue over the past year.
Last year, Otter Tail's businesses weren't giving it many benefits from diversification. Certainly, wind energy stock American Superconductor
But Otter Tail may be starting to get moving in the right direction again. Just last month, the company reported a turnaround in net income, going from a big loss on continuing operations to a gain. Moreover, it has taken some of its disparate businesses and refocused them into a more cohesive whole.
Otter Tail isn't close to being a perfect stock, and it may never get there. But it's good to see a company strive toward perfection, and Otter Tail seems to be on the right course.
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.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Southern Company and Otter Tail. 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.