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 Textron (NYS: TXT) 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 Textron.
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%
1 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With just a single point, Textron has found its business pretty well grounded lately. But a potential recovery could have the company climbing again in the near future.
Textron has four primary divisions. Perhaps the worst-hit is its Cessna business jet division, which saw revenue plummet during and after the financial crisis. The company also makes helicopters for commercial and military use, military hardware, and specialized vehicles like golf carts.
Textron faces many challenges. Among business jets, General Dynamics' (NYS: GD) Gulfstream and Embraer (NYS: ERJ) are solid competitors, although Cessna maintains leading global market share. In addition, threats of defense spending cuts have hurt the entire industry, with companies like Boeing (NYS: BA) and Lockheed Martin (NYS: LMT) facing potential reductions or cutbacks in military revenue. One positive for Textron, though, is that with its emphasis on unmanned aircraft and surveillance, it's on the cutting edge of a trend that could actually benefit from cutbacks.
For Textron to reach perfection, it needs to start firing on all cylinders with its major divisions. If it can do that, though -- and there's no reason not to expect a better economy eventually -- then Textron could put its poor showing behind it and get a lot closer to perfection in the years to come.
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 Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of General Dynamics, Textron, and Lockheed Martin. Motley Fool newsletter services have recommended buying shares of Embraer. 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 a disclosure policy.
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