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 Delta Air Lines (NYS: DAL) 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 Delta Air Lines.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||14.9%||Fail|
|1-Year Revenue Growth > 12%||10.6%||Fail|
|Margins||Gross Margin > 35%||20.1%||Fail|
|Net Margin > 15%||2.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||NM||NM|
|Current Ratio > 1.3||0.61||Fail|
|Opportunities||Return on Equity > 15%||NM||NM|
|Valuation||Normalized P/E < 20||12.37||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 8|
Source: S&P Capital IQ. NM = not meaningful due to negative shareholder equity. Total score = number of passes.
Since we looked at Delta Air Lines last year, the company's score has fallen by two points. With shareholder equity having gone negative, the airline still faces balance-sheet woes that pose a long-term threat to the company.
Delta actually had a good year in 2011. With a combination of baggage fee revenue and high fares, Delta earned more than $850 million in profit for the year. Yet AMR's recent bankruptcy shows just how quickly fortunes can change among airlines.
Indeed, fuel costs and lagging traffic have started to catch up with the industry. Southwest Airlines (NYS: LUV) recently said that high fuel prices could prevent it from earning a profit this quarter, while both Southwest and US Airways (NYS: LCC) have had trouble getting passengers in airplane seats. Bad conditions have led United Continental (NYS: UAL) to cut back on its capacity in the hopes of supporting higher fares and cutting costs.
One key question for Delta going forward is whether it can acquire more fuel-efficient planes. It has ordered Dreamliner aircraft from Boeing (NYS: BA) , but Delta agreed to wait until 2020 to receive them.
For Delta to climb closer to perfection, it will need to outlast its competition long enough to maintain higher fares. Yet even so, it probably also needs the tailwind of falling oil prices to help it recoup its major losses from years past. Without those favorable circumstances, Delta may never be a perfect stock.
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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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. 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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