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 Consolidated Edison (NYS: ED) 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 Consolidated Edison.
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: S&P Capital IQ. Total score = number of passes.
When we looked at Consolidated Edison last year, it only managed to score two points, so the company has improved somewhat since then. A tick up in gross margins makes the difference, but the utility still has some work to do to reach for perfection.
At a time when many investors are fearful of a coming bear market, utility stocks like ConEd gain in popularity as defensive plays that tend to hold up well during stock market downturns. Although it's not the largest utility, ConEd is the most watched, thanks to its prominence in providing gas and electricity to the nation's biggest city.
The primary driver of potential growth for ConEd is economic activity in the New York City area. Yet compared to other utilities in surrounding regions, including National Grid (NYS: NGG) , Exelon (NYS: EXC) , and Public Service Enterprise Group (NYS: PEG) , ConEd weighs in with subpar returns on equity and fairly weak margins. Yet even with this disadvantage, ConEd shares carry a higher normalized earnings multiple than all three, as well as Duke Energy (NYS: DUK) and Dominion Resources (NYS: D) .
What interests most investors in ConEd, though, is its dividend, which it has raised every year for 37 years running. That streak qualifies it for inclusion on the prestigious Dividend Aristocrats list. Yet when you look at the company's actual payouts, you'll see that for the past several years, the company has only made token half-penny increases in its quarterly dividend.
ConEd gives investors the stability and security they've come to expect from utility stocks. But for growth investors, it's far from perfect, and even those who prefer more conservative investments could do better elsewhere in the industry.
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
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