Has Huntsman Become the Perfect Stock?
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 Huntsman (NYS: HUN) 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 Huntsman.
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 Huntsman last year, the company has kept its five-point score. The stock has similarly performed in a fairly tight range, gaining about 10% in the past year.
Huntsman doesn't have as well-known a name as some of its bigger rivals in the chemical industry, but it has benefited from many of the same trends that have boosted its competitors. With its focus on polyurethanes generally and a particular product called MDI, Huntsman manages to surpass even Dow Chemical's (NYS: DOW) share of the business for that market. Moreover, the business has helped Huntsman grow, especially given MDI's importance in emerging markets.
Another trend helping chemical companies is the substantial rise in prices of titanium dioxide, a pigment that's very important for paint production. Industry giant DuPont (NYS: DD) has plans to open a new plant to make the pigment within the next few years, and Kronos Worldwide (NYS: KRO) has taken full advantage of rising prices to boost sales, even as the ailing European economy has proven to be an obstacle. But Huntsman is also claiming its share of the pie.
Unfortunately, Huntsman hasn't been entirely consistent. Back in May, the company crushed analysts' first-quarter estimates, sending the stock soaring on high MDI demand. More recently, though, weakness in revenue has some questioning the company's future prospects, despite another good quarter for the bottom line.
For Huntsman to keep improving, it would benefit most from renewed growth in Europe and greater macroeconomic stability in emerging markets. Alternatively, Dow or another chemical company could choose to go after Huntsman as a takeover candidate. Either way, Huntsman could take its very low valuation and give shareholders a nice reward in the coming months and years.
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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The article Has Huntsman Become the Perfect Stock? originally appeared on Fool.com.Fool contributorDan Caplingerdoesn't own shares of the companies mentioned. 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 adisclosure policy.