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 (Nasdaq: OTTR) 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 Otter Tail.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (1.2%) | Fail |
| 1-Year Revenue Growth > 12% | 19.0% | Pass | |
| Margins | Gross Margin > 35% | 19.8% | Fail |
| Net Margin > 15% | (4.3%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 87.0% | Fail |
| Current Ratio > 1.3 | 1.58 | Pass | |
| Opportunities | Return on Equity > 15% | (0.1%) | Fail |
| Valuation | Normalized P/E < 20 | 37.65 | Fail |
| Dividends | Current Yield > 2% | 5.0% | Pass |
| 5-Year Dividend Growth > 10% | 0.5% | Fail | |
| Total Score | 3 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Otter Tail last year, the company hasn't managed to gain any ground on its three-point score. But shareholders probably don't mind too much given the stock's rise of more than 20% over the past year.
Until this year, Otter Tail resembled a mini-conglomerate. Although the company has more revenue from its electric utility business than any other division, it also has substantial sales in wind energy, manufacturing, construction, and plastics.
But, early in 2012, Otter Tail's management decided to make the company more focused in its efforts. Back in February, Fool contributor Anders Bylund mourned the divestiture of Otter Tail's potato processing, trucking, and recreational equipment businesses over the past year and a half, but some investors may prefer the company to concentrate on being an electrical utility. Then just earlier this month, the company sold its DMI Industries wind tower manufacturing business to Trinity Industries (NYSE: TRN) for $20 million.
The stock has responded well to the moves, with shares at their highest levels in nearly three years. That's consistent with how its larger peers in the industry have performed, with Southern (NYSE: SO) and Duke Energy (NYSE: DUK) among those benefiting from lower natural gas prices and demand from dividend-hungry investors. But Otter Tail stands out because of its geography; like MDU Resources (NYSE: MDU), Otter Tail includes parts of the Dakotas in its coverage area, giving both companies the growth potential that big energy finds in the Bakken have produced throughout the region.
For Otter Tail to improve, it needs to move forward with its newly focused business and find ways to take advantage of its marketplace. If it can succeed, then Otter Tail has plenty of room to run 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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