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 FirstEnergy (NYS: FE) 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 FirstEnergy.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.4%||Fail|
|1-Year Revenue Growth > 12%||16.1%||Pass|
|Margins||Gross Margin > 35%||54.3%||Pass|
|Net Margin > 15%||6.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||135.7%||Fail|
|Current Ratio > 1.3||0.68||Fail|
|Opportunities||Return on Equity > 15%||8.3%||Fail|
|Valuation||Normalized P/E < 20||15.57||Pass|
|Dividends||Current Yield > 2%||4.9%||Pass|
|5-Year Dividend Growth > 10%||4.1%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at FirstEnergy last year, the utility has picked up an extra point. Faster revenue growth made the difference in 2011, but the company still faces plenty of challenges.
FirstEnergy is an electric utility that generates, transmits, and distributes electricity, along with providing other energy-related services. Headquartered in Akron, the company serves customers in Ohio and several surrounding states.
Earlier this year, FirstEnergy closed on its merger with Allegheny Energy. The move should help bolster FirstEnergy's overall financial results and also cut costs, which have hurt not only its results but also those of competitors including Dominion Resources (NYS: D) and PPL (NYS: PPL) .
But FirstEnergy is also looking to capitalize on competitive pressure to pick up new business. The company has gone up against competitors American Electric Power (NYS: AEP) , Duke Energy (NYS: DUK) , and Exelon (NYS: EXC) to try to win over new customers in various parts of the Midwest, and it has had some success in doing so, thanks to FirstEnergy's more competitive rates.
No utility is likely ever to get a perfect 10 on this scale, but for FirstEnergy to get closer, it needs to keep focusing on using its leverage to boost its returns on equity. Even without those changes, though, a solid dividend near 5% that has grown steadily in recent years could be all you can ask for from FirstEnergy.
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.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Exelon and Dominion Resources, as well as writing a covered strangle position in Exelon. 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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