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 Beam (NYS: BEAM) 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 Beam.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3.1%)||Fail|
|1-Year Revenue Growth > 12%||24.1%||Pass|
|Margins||Gross Margin > 35%||43.1%||Pass|
|Net Margin > 15%||13.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||43.4%||Pass|
|Current Ratio > 1.3||2.20||Pass|
|Opportunities||Return on Equity > 15%||4.4%||Fail|
|Valuation||Normalized P/E < 20||21.59||Fail|
|Dividends||Current Yield > 2%||1.5%||Fail|
|5-Year Dividend Growth > 10%||(12.4%)||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes. Note: S&P Capital IQ data includes segment adjustments to incorporate spinoffs and asset sales.
With four points, Beam hasn't gotten to perfection yet. But compared to the results of Fortune Brands last year, the stock has made some progress, with higher sales and a lower debt load.
Beam is the company behind popular alcohol brands like Jim Beam bourbon and Canadian Club whiskey. With the old Fortune Brands having split up, Fortune Brands Home & Security (NYS: FBHS) inherited the old home and security business, while Beam got the spirits business. That makes the surviving Beam a direct competitor to Diageo (NYS: DEO) and Brown-Forman (NYS: BF.B) .
Some analysts, however, think that Beam may not last long as an independent company. With its strong assets, Beam could be an acquisition target for its rivals, which may have held off when Fortune was much larger and included a bunch of unrelated businesses.
Like cigarette sellers Philip Morris International (NYS: PM) and Altria (NYS: MO) , investing in Beam requires investors to feel comfortable with so-called "sin" stocks. But the long-term performance of Beam and predecessor Fortune shows just how profitable the industry can be.
To keep improving, Beam needs to maintain its sales growth and find ways to turn its reasonable net margins into better returns on equity. Combined with getting its dividend moving back in the right direction, those moves would go a long way toward getting Beam firmly on an upward path.
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 Philip Morris International, Diageo, and Altria Group. Motley Fool newsletter services have recommended buying shares of Beam, Diageo, and Philip Morris International. 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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