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 Arctic Cat (NAS: ACAT) 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 Arctic Cat.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(7.1%)||Fail|
|1-Year Revenue Growth > 12%||11.2%||Fail|
|Margins||Gross Margin > 35%||22.0%||Fail|
|Net Margin > 15%||3.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.09||Pass|
|Opportunities||Return on Equity > 15%||9.7%||Fail|
|Valuation||Normalized P/E < 20||25.28||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only two points, Arctic Cat isn't going anywhere fast. But the company made a big deal with a large shareholder that should leave it freer to act independently and move forward with its business.
Arctic Cat makes snowmobiles and all-terrain vehicles, along with replacement parts, accessories, and clothing lines that go with them. That may sound like a business fraught with peril in a slow economy, but even though rival Polaris Industries (NYS: PII) and motorcycle maker Harley-Davidson (NYS: HOG) both weighed in with reports that disappointed investors recently, the stocks have done fairly well in a flat year for the overall market.
The trouble, though, is that some of those gains come after a long period of pain for the industry. Both Arctic Cat and Harley still haven't regained their revenue levels from five years ago, and Honda Motor (NYS: HMC) , which obviously has a much larger auto business in the picture, has struggled in the aftermath of Japan's earthquake.
But earlier this week, Arctic Cat announced that it would buy back the 33% stake that Suzuki Motor owns for the bargain price of $13 per share. With the stock already trading in the high teens even before the announcement, Arctic Cat got another big boost after the news. More importantly, though, having Suzuki out of the picture will make it easier for the company to move forward with its own business initiatives.
The Suzuki buyout may be just the catalyst that Arctic Cat needs to push back toward perfection. Just as vehicle maker Ford (NYS: F) was able to outlast the recession and recover, so too may Arctic Cat eventually thrive. But until the economy starts to cooperate fully, you shouldn't expect the stock to go too much further than it already has.
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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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 Ford. Motley Fool newsletter services have recommended buying shares of and creating a synthetic long position in Ford. 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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