Is Checkpoint Systems the Perfect Stock?

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 Checkpoint Systems (NYS: CKP) 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 Checkpoint Systems.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

5.3%

Fail

 

1-Year Revenue Growth > 12%

2.6%

Fail

Margins

Gross Margin > 35%

38.6%

Pass

 

Net Margin > 15%

(4.8%)

Fail

Balance Sheet

Debt to Equity < 50%

28.2%

Pass

 

Current Ratio > 1.3

1.89

Pass

Opportunities

Return on Equity > 15%

2.6%

Fail

Valuation

Normalized P/E < 20

21.81

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

3 out of 10

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

With a score of only 3, Checkpoint Systems isn't making investors feel very secure. The security specialist has seen very hard times over the past year and is making gargantuan efforts to get back in the game.

Checkpoint is best known for the radio-frequency ID tags that you'll find most frequently in retail stores. Try to run out of the store with an item -- or make the mistake of going to a new cashier who forgets to take off the tag -- and you'll get that embarrassing ear-piercing shriek that lets the whole world know you've done something bad.

Checkpoint has plenty of competition. Avery Dennison (NYS: AVY) makes label tags and various other retail merchandising solutions, while Tyco's (NYS: TYC) ADT subsidiary has rival systems for electronic article surveillance. In addition, Checkpoint's fire detection business goes up against Tyco and Stanley Black & Decker (NYS: SWK) .

One problem is that the company's strategic direction seems to be confusing investors. For instance, earlier this week, Checkpoint announced earnings that soundly beat analyst estimates -- which had already fallen sharply in the past month in response to the company having slashed its guidance for the quarter and full year. But when Checkpoint's CEO said that the company planned to expand its cost-cutting efforts in its restructuring plan, the stock gave back all its gains. Shareholders now seem concerned that the company's future growth is threatened by cuts that may be too deep.

To thrive, Checkpoint needs retailers to get back on their feet. A rebounding economy should help Checkpoint start executing on its strategic plans and get 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 the best investments from the rest.

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

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. 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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