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 Goodyear Tire (NYS: GT) 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 Goodyear Tire.
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 Goodyear Tire last year, the company's score was the same. The company has seen much better sales growth this year, but it has come at the expense of return on equity.
Goodyear has had a huge turnaround. During the recession, the same slow sales of cars that brought Ford (NYS: F) and General Motors (NYS: GM) to their knees also hurt the tire business. Both Goodyear and Cooper Tire & Rubber (NYS: CTB) struggled to survive early 2009's market meltdown.
Back in July, Goodyear showed just how strong its turnaround story has been, posting quarterly results that included a big jump in revenue despite declines in overall tire volume. Yet the company also said that costs of raw materials would likely rise substantially, eventually reining in investors' enthusiasm. Then in August, CFO Darren Wells said that he expected the company to have its first annual profit since 2007.
Yet investors remain dubious of Goodyear's success. With a forward earnings multiple of just 6, fears of a double-dip recession clearly dominate hopes for continuing recovery.
The key to Goodyear's perfection is for the tire company to keep cutting debt while continuing to focus on its strategy of higher-margin sales. If it can stay on the straight and narrow for a while, Goodyear should start to show some progress toward perfection in the future.
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 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 Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. 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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