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 Wal-Mart (NYS: WMT) 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 Wal-Mart.
|Growth||5-Year Annual Revenue Growth > 15%||5.1%||Fail|
|1-Year Revenue Growth > 12%||6.9%||Fail|
|Margins||Gross Margin > 35%||24.9%||Fail|
|Net Margin > 15%||3.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||73.7%||Fail|
|Current Ratio > 1.3||0.83||Fail|
|Opportunities||Return on Equity > 15%||23.5%||Pass|
|Valuation||Normalized P/E < 20||14.63||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||15.6%||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Wal-Mart last year, the company has kept its four-point score. But a 20% gain for the shares shows how the discount retailer has finally broken out of a slump and started growing again.
Wal-Mart's success in low-cost retail has been legendary. Yet after benefiting greatly during the recession and financial crisis in 2008, Wal-Mart saw a big slowdown that led to nine straight quarters of falling U.S. same-store sales.
More recently, though, Wal-Mart has started turning things around. Same-store sales have now risen three quarters in a row, and with concerns about the future of the economy getting larger, Wal-Mart is again capturing the attention of shoppers looking to save. The company has also responded to competition from deep-discounting dollar stores by trying out smaller store formats, a move that could also help it fight against losing business to online retail giant Amazon.com (NAS: AMZN) .
One area where Wal-Mart has stayed ahead of its competition is in global expansion. While Target (NYS: TGT) and Costco (NAS: COST) are largely domestically focused, Wal-Mart has more than half of its stores located outside North America. That should help give Wal-Mart an edge in the long run as emerging markets expand, although it will have to deal with PriceSmart (NAS: PSMT) and other international retailers already doing business in overseas markets.
The big controversy on everyone's minds with Wal-Mart is its recent Mexican bribery scandal. But already, investors seem to be moving past that to refocus on Wal-Mart's growth potential. If it can put the bribery episode behind it, Wal-Mart has the potential to produce impressive gains in the next economic cycle and beyond.
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 in this article. The Motley Fool owns shares of Amazon.com and Costco. Motley Fool newsletter services have recommended buying shares of PriceSmart, Costco, and Amazon.com, as well as creating a diagonal call position in Wal-Mart. 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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