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 Aqua America 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 Aqua America.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

4.7%

Fail

 

1-year revenue growth > 12%

6.4%

Fail

Margins

Gross margin > 35%

64.1%

Pass

 

Net margin > 15%

25.9%

Pass

Balance sheet

Debt to equity < 50%

120.5%

Fail

 

Current ratio > 1.3

0.95

Fail

Opportunities

Return on equity > 15%

14%

Fail

Valuation

Normalized P/E < 20

26.00

Fail

Dividends

Current yield > 2%

2.4%

Pass

 

5-year dividend growth > 10%

6.9%

Fail

       
 

Total score

 

3 out of 10

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

Since we looked at Aqua America last year, the company has held its three-point score for the third year in a row. But the stock has soared, climbing 30% over the past year.

Water has become an increasingly important resource, and Aqua America delivers water to thirsty customers throughout much of the eastern U.S. as well as Texas. Working largely in a regulated utility environment, Aqua America enjoys solid and stable profits, although it competes with American Water Works and other industry peers when it seeks to expand into new markets. Overcoming that competition, Aqua America acquired 18 new water companies and wastewater systems in 2012.

But one area where Aqua America hopes to find substantial growth is in supplying water to energy producers for hydraulic fracturing. Its joint venture with Penn Virginia Partners has raised substantial controversy among anti-fracking activists, but CEO Nicholas DeBenedictis has identified the industry as an important potential growth driver. Water-management company Heckmann has certainly cashed in on the trend lately, as it has focused on the other end of the issue by treating and disposing of water after its use in hydrofracking.

In its most recent financial results, Aqua America reported extremely strong results, with 2012 net income nearly doubling from the previous year. Already, its fracking water supply business is profitable, and major infrastructure investments have also led to tax benefits.

For Aqua America to improve, it needs its recent growth to translate into even more earnings. As water becomes more important, however, it's easy to envision Aqua America moving closer to perfection.

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 out the best investments from the rest.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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

The article Has Aqua America Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Aqua America. The Motley Fool owns shares of and has options positions on Heckmann. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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