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 Exelon
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 Exelon.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 4.0% | Fail |
| 1-Year Revenue Growth > 12% | 7.7% | Fail | |
| Margins | Gross Margin > 35% | 40.9% | Pass |
| Net Margin > 15% | 13.7% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 95.2% | Fail |
| Current Ratio > 1.3 | 1.51 | Pass | |
| Opportunities | Return on Equity > 15% | 19.6% | Pass |
| Valuation | Normalized P/E < 20 | 9.99 | Pass |
| Dividends | Current Yield > 2% | 5.2% | Pass |
| 5-Year Dividend Growth > 10% | 5.6% | Fail | |
| Total Score | 5 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With five points, Exelon delivers a solid but unremarkable performance. Like many of its utility peers, the company has strong dividends and an attractive valuation but lacks growth and has a fairly high debt load to maintain.
Until the Japanese earthquake hit, Exelon looked to be square in the middle of a promising business. As a giant in nuclear power, Exelon was on the cutting edge of a fossil fuel alternative that was experiencing huge growth.
But after the quake, investors ran away from Exelon because of its nuclear exposure. Despite the fact that competitors Duke Energy
The question going forward is whether fears about nuclear energy are overblown. Despite the tragedy in Japan, cheap, non-carbon-producing energy remains a global priority, and companies like Exelon will be the ones to deliver it. Things may be bumpy for shareholders, but value investors may want to look at Exelon as a beaten-down opportunity.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.
