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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Republic Services (NYSE: RSG ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Republic.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||23.8%||pass|
|1-Year Revenue Growth > 12%||30.5%||pass|
|Margins||Gross Margin > 35%||41.2%||pass|
|Net Margin > 15%||4.7%||fail|
|Balance Sheet||Debt to Equity < 50%||92.6%||fail|
|Current Ratio > 1.3||0.52||fail|
|Opportunities||Return on Equity > 15%||5.0%||fail|
|Valuation||Normalized P/E < 20||19.34||pass|
|Dividends||Current Yield > 2%||2.6%||pass|
|5-Year Dividend Growth > 10%||18.9%||pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Republic Services doesn't get a perfect score, but its 6-out-of-10 performance isn't bad. While top-line growth soared in part because of a major acquisition of Allied Waste, Republic has done a good job of turning your trash into its treasure, and that has captured the attention of some high-profile investors.
Looking at the numbers, it's easy to see why. Waste disposal is a fast-growing business, and Republic has been eating archcompetitor Waste Management's (NYSE: WM ) dust when it comes to capturing market share. Even with its growth, though, Republic remains committed to returning money to shareholders through healthy and growing dividends.
The company's largest shareholder is Cascade Investment, which is controlled by Microsoft co-founder Bill Gates. In addition, Warren Buffett's Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) increased its position in Republic the most out of all its holdings last year, more than doubling its holding. Add in big positions from Fidelity and hedge fund manager Blackstone (NYSE: BX ) , and you can see that investors in Republic are in good company.
You can hardly find an industry with more job security than managing waste. Once Republic takes care of some troubling short-term balance sheet issues, you can expect its stock to keep being anything but garbage.
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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