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 General Dynamics (NYS: GD) 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 General Dynamics.
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 General Dynamics last year, it hasn't managed to earn back the point it lost between 2010 and 2011. The stock has also remained largely in the doldrums, posting a gain of less than 10% over the past year.
Defense stocks have been on edge for a long time, as the necessity of federal budget cuts continues to hang over the U.S. economy. Peer Lockheed Martin (NYS: LMT) raised the threat of layoffs earlier this year if the budget cuts called for under sequestration become reality, and both it and Northrop Grumman (NYS: NOC) have substantial portions of their businesses that are potentially vulnerable to cuts. But with General Dynamics' big stable of capital-intensive warships and tanks, Fool contributor Dan Carroll argues that it could be the big loser from sequestration -- if it even happens. Given the relatively strong performance from Lockheed, Northrop, and Raytheon (NYS: RTN) , investors seem doubtful that we'll ever get to the point where sequestration will become reality.
But an interesting shakeup could create an opportunity for General Dynamics. With the planned merger of BAE Systems and EADS called off, Fool analyst Brendan Byrnes believes that BAE could split itself up, with Boeing (NYS: BA) taking its civil aviation unit, Lockheed taking military aviation, and General Dynamics taking over BAE's land systems division.
Through all the uncertainty, though, General Dynamics remains a dividend stalwart. In fact, the company joined the renowned Dividend Aristocrats list earlier this year, with more than two decades of consecutive annual dividend increases.
For General Dynamics to improve, some clarity on the future of the U.S. defense budget would be enormously helpful. Even if the company does suffer cuts, it will be easier for it to plan once the extent of those cuts becomes better known.
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.
General Dynamics may need help from a strong Defense Department to reach its full potential, but Boeing has all the business it could ever need already waiting for it to deliver. However, the company's execution problems and emerging competitors have investors wondering whether Boeing will live up to its shareholder responsibilities. In our latest premium report, two of the Fool's best minds on industrials have collaborated to provide investors with the key, must-know issues around Boeing. They'll be updating the report as key news hits, so make sure to claim a copy today by clicking here now.
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The article Has General Dynamics Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.