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 Progress Energy (NYS: PGN) 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 Progress Energy.
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%
3 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just three points, Progress Energy doesn't look like it's making much progress toward perfection. Soon, though, the utility is slated to join up with one of the giants of the industry.
Progress Energy is an electric utility headquartered in North Carolina. Most of its revenue comes from regulated activity, including providing electricity directly to consumers.
Earlier this year, Progress agreed to a merger offer from Duke Energy (NYS: DUK) . The combined entity would have a presence throughout the Southeast and Midwest, becoming the largest electric utility in the United States and competing directly with regional powerhouses like Southern Company (NYS: SO) .
The problem is that previous attempts to complete mergers of this size have run into insurmountable hurdles from federal and state regulators. Proposed combinations between NextEra Energy (NYS: NEE) and Constellation Energy (NYS: CEG) , as well as Exelon (NYS: EXC) and Public Service Enterprise Group (NYS: PEG) , didn't go through because of regulatory challenges. So until the deal gets final approval, don't count on Progress Energy disappearing as an independent entity.
At this point, though, investors are pretty much counting on a deal going through. If it doesn't, then shares could take a big hit. Either way, it's hard to conclude that Progress gets you particularly close to perfection in its current state.
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.
Click here to add Progress Energy to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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.
At the time thisarticle was published
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.