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 T. Rowe Price (Nasdaq: TROW ) 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 T. Rowe Price.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9.5%||Fail|
|1-Year Revenue Growth > 12%||20.3%||Pass|
|Margins||Gross Margin > 35%||64.5%||Pass|
|Net Margin > 15%||28.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||3.28||Pass|
|Opportunities||Return on Equity > 15%||24.5%||Pass|
|Valuation||Normalized P/E < 20||19.15||Pass|
|Dividends||Current Yield > 2%||2.2%||Pass|
|5-Year Dividend Growth > 10%||16.5%||Pass|
|Total Score||9 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at T. Rowe Price last year, the fund company has almost achieved perfection, picking up two points. A fall in its share price combined with improving earnings and dividend payouts helped push its earnings multiple down and its yield up.
T. Rowe Price is well-known for its mutual fund business. The company stands up to competitors like AllianceBernstein (NYSE: AB ) in the fund space despite not charging sales loads that many other fund companies use as an incentive for brokers to sell their funds, generating revenue.
But a potentially larger threat to T. Rowe Price's mutual fund strength comes from exchange-traded funds. Companies like BlackRock (NYSE: BLK ) , State Street (NYSE: STT ) , and Vanguard have turned ETFs into a trillion-dollar industry with substantial profits. But more important, the low expenses on ETFs make even the no-load funds that T. Rowe Price offers look expensive by comparison. That has put a crimp in the company's earnings recently.
What's particularly interesting about T. Rowe is its ability to grab up private placements. For instance, when Netflix (Nasdaq: NFLX ) sought new capital, it went to T. Rowe and a venture capital firm to issue stock and bonds rather than making a public secondary offering. In addition, T. Rowe grabbed up stakes in social media companies Groupon (Nasdaq: GRPN ) and Angie's List (Nasdaq: ANGI ) before they went public, as well as taking positions in Facebook, Twitter, and Zynga.
Clearly, T. Rowe Price has done almost everything it needs in order to reach our top score, and if its revenue growth continues, it could get there in the near future. In fact, with shares having remained flat over the past few years, I'm confident enough about the stock's prospects to make a CAPScall for T. Rowe Price to outperform the S&P 500 over the next five years.
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 T. Rowe Price 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."