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 Caterpillar Inc. (NYSE:CAT) 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:
With those factors in mind, let's take a closer look at Caterpillar.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-year annual revenue growth > 15%||7.9%||Fail|
|1-year revenue growth > 12%||9.5%||Fail|
|Margins||Gross margin > 35%||27.4%||Fail|
|Net margin > 15%||8.6%||Fail|
|Balance sheet||Debt to equity < 50%||228.3%||Fail|
|Current ratio > 1.3||1.43||Pass|
|Opportunities||Return on equity > 15%||36.9%||Pass|
|Valuation||Normalized P/E < 20||11.94||Pass|
|Dividends||Current yield > 2%||2.1%||Pass|
|5-year dividend growth > 10%||7.9%||Fail|
|Total score||4 out of 10|
Since we looked at Caterpillar last year, the company has given back one of the two points it gained from 2011 to 2012. Falling revenue growth was to blame, and the stock has felt the consequences, dropping about 15% over the past year.