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 Swisher Hygiene (NAS: SWSH) 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 Swisher Hygiene.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||25.9%*||Pass|
|1-year revenue growth > 12%||168.4%||Pass|
|Margins||Gross margin > 35%||39.7%||Pass|
|Net margin > 15%||(14.7%)||Fail|
|Balance sheet||Debt to equity < 50%||18%||Pass|
|Current ratio > 1.3||2.98||Pass|
|Opportunities||Return on equity > 15%||(14.9%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes. *Past four years.
With five points, Swisher Hygiene doesn't exactly clean up on our 10-point scale. But the company has its foot in a growing niche market, and it's making some smart moves to stand up to much larger competition.
Swisher has an interesting history. Well-known entrepreneur Wayne Huizenga was a co-founder of rival Waste Management (NYS: WM) in the late 1960s, but he left the company to buy into Blockbuster and later AutoNation. In 2004, Huizenga bought a majority stake in Swisher from its founder for a mere $8 million.
Cleaning up after a growing world has become a huge industry. In addition to Waste Management, a number of companies have jumped into the niche areas that Swisher is targeting. Ecolab (NYS: ECL) provides commercial cleaning services for large restaurant and hotel chains, while Swisher aims more at smaller companies. Similarly, Stericycle (NAS: SRCL) helps hospitals and other medical facilities deal with biomedical waste, but Swisher also has some business in the sector.
Swisher has grown substantially through numerous acquisitions. But the problem is that the company still hasn't become profitable, and investors are getting restless. With a big part of Swisher's assets being intangibles arising from those acquisitions, some may have doubts about how much they should rely on the balance sheet looking forward.
With Huizenga as chairman of the board, Swisher has plenty of future potential. The question is whether it will start executing. If it does, then Swisher could start moving toward perfection sooner rather than later.
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. The Motley Fool owns shares of Ecolab and Waste Management. Motley Fool newsletter services have recommended buying shares of Waste Management and Stericycle, as well as writing a covered strangle position in Waste Management. 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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