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 Alpha Natural Resources (NYS: ANR) 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 Alpha Natural Resources.
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 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Alpha Natural Resources last year, it has lost two points. Going from profitability to a big loss, along with a decaying balance sheet, held the company back. The stock also crushed shareholders, losing about half its value over the past year.
For years during the global economic expansion, Alpha Natural and other coal companies soared on huge international demand. But the revolution in U.S. energy production that created gluts of natural gas has turned the coal market upside down, with Patriot Coal having had to declare bankruptcy and other major players seeing huge drops in business. Alpha has managed to keep sales moving higher, but CONSOL Energy (NYS: CNX) and Cliffs Natural Resources (NYS: CLF) haven't been so lucky, as they've suffered revenue contraction in the past year.
But long term, the argument for coal and Alpha Natural remains strong. The Energy Information Administration still expects coal to provide 35% of U.S. power in 2040, admittedly down from 42% but still representing a huge portion of overall electricity consumption.
Moreover, with coal stocks having been beaten down so hard, any glimmer of good news could send Alpha Natural soaring. Earlier this month, positive news out of China pushed Alpha up more than 11% in a single day, with Arch Coal (NYS: ACI) and Peabody Energy (NYS: BTU) similarly following suit. With the recent change in leadership in China, an emphasis on infrastructure and construction to try to reinvigorate economic growth could help Arch, Peabody, and Alpha, among other industry players.
For Alpha Natural to improve, it needs to weather the storm and position itself for what seems like an inevitable recovery in coal prices. That may take a while, but when it comes, astute investors will be ready to take advantage.
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 Alpha Natural Resources Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above, and neither does The Motley Fool. 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.
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