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 whether Oshkosh (NYS: OSK) 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 Oshkosh.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
4 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just four points, Oshkosh doesn't put up much of a fight. The defense contractor is suffering along with its entire industry in an environment of huge uncertainty.
Defense stocks across the board have taken damage from incessant budget wrangling on Capitol Hill. Yet some, including Fool analyst Andrew Tonner, think the declines have been overdone. Many contractors, including Lockheed Martin (NYS: LMT) and Boeing (NYS: BA) , have actually seen order backlogs riseover the past year.
Still, Oshkosh deserves some of the hit that its stock has taken, because it created the root of its problems long before funding tightened up. Two years ago, it won a contract to provide off-road armored vehicles to the Pentagon, beating out Force Protection (NAS: FRPT) and Navistar (NYS: NAV) , among others. Yet as it's turned out, the company underbid on the project, and cost overruns are threatening to turn the project into a money-loser. That's put Oshkosh's overall profits under pressure.
To reverse its decline, Oshkosh needs to understand that even in a tough competitive environment, it doesn't pay to do whatever it takes to win business. Its shares are a huge bargain, but it'll still likely be a while before Oshkosh can turn things around and look more like a perfect stock.
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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At the time thisarticle was published Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our13 Steps to Investing Foolishly.Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Lockheed Martin and Oshkosh. 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 adisclosure policy.
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