Has General Electric 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 General Electric (NYS: GE) 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 Electric.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 0.1% Fail
  1-Year Revenue Growth > 12% 1.9% Fail
Margins Gross Margin > 35% 38.3% Pass
  Net Margin > 15% 9.9% Fail
Balance Sheet Debt to Equity < 50% 367.7% Fail
  Current Ratio > 1.3 2.35 Pass
Opportunities Return on Equity > 15% 11.8% Fail
Valuation Normalized P/E < 20 14.06 Pass
Dividends Current Yield > 2% 3.7% Pass
  5-Year Dividend Growth > 10% (10.3%) Fail
       
  Total Score   4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at General Electric last year, the company has managed to double its score. Improvement in its gross margins along with a big drop in valuation give GE an extra two points on the scale, but the conglomerate clearly has farther to go.

It's hard to exaggerate General Electric's reach across a wide swath of industries. Its aviation segment goes up against United Technologies (NYS: UTX) in producing aircraft engines and related equipment. Meanwhile, GE's health-care division competes with Abbott Labs (NYS: ABT) and Medtronic (NYS: MDT) with medical imaging, diagnostic, and monitoring systems. And of course, everyone's familiar with GE's home appliances, where it stands up to Whirlpool (NYS: WHR) and other rivals.

What has been GE's recent downfall, however, is its finance division. During the 2000s, the GE Capital segment became huge in comparison to its industrial businesses. That was fine as long as times were good, but when the financial crisis hit, even what had once been the largest market-cap company in the U.S. stock market suffered a near-fatal blow. Since then, the company has recovered quite a bit, but financial woes still represent a sizable obstacle among GE's challenges going forward.

But beyond its current problems, GE still looks poised to carry the world into the 22nd century and beyond. With its huge investment in non-petroleum energy production, including natural gas and wind turbines as well as solar and nuclear energy, GE appears poised to take over when Big Oil's dominance eventually gives way to alternatives.

For GE to continue its march toward perfection, it needs to keep getting back to its industrial roots. As debt levels fall with a move away from its financial business, the company should be better able to boost margins and returns on equity without finance-related gimmicks. With that plan in place, GE could well soon regain its status as a stalwart stock for the 21st century and beyond.

Keep searching
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.

Click here to add General Electric to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our " 13 Steps to Investing Foolishly ."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Abbott Labs and Medtronic. Motley Fool newsletter services have recommended buying shares of Abbott Labs. 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Introduction to Value Investing

Are you the next Warren Buffett?

View Course »

Investing in Real Estate

Learn the basics of investing in real estate.

View Course »

Add a Comment

*0 / 3000 Character Maximum