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 Tata Motors (NYS: TTM) 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 Tata Motors.
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%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Tata Motors last year, the Indian auto company has picked up a point. But long-term investors aren't happy about the reason: The stock's big drop was largely what helped push the company's dividend yield above the 2% level.
Tata is best known for making the world's cheapest car. With its home-field advantage in one of the largest emerging markets in the world, Tata would seemingly have the inside track to profit from the up-and-coming middle class in India.
But Tata faces a couple of large threats. On one hand, India's macroeconomic picture isn't cooperating, as growth slows on the subcontinent. At the same time, though, competition has gotten more fierce, as Ford (NYS: F) , Toyota (NYS: TM) , and General Motors (NYS: GM) have all turned to India as a potential growth market. More recently, flooding in Thailand forced Tata to shut down a pickup plant there, although its problems don't appear as severe as what Honda (NYS: HMC) suffered.
What may be Tata's biggest opportunities going forward, though, are its Land Rover and Jaguar models. Like upstart Tesla Motors (NAS: TSLA) , these luxury brands aim at more affluent buyers who aren't as vulnerable to the whims of the economy. If Tata can use those brands to improve net margins and start getting some of its debt off its balance sheet, then it could get a lot closer to perfection in the years ahead.
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 Ford. Motley Fool newsletter services have recommended buying shares of General Motors, Tesla Motors, and Ford. 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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