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 PepsiCo (NYSE: PEP ) 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 PepsiCo.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||13.1%||Fail|
|1-year revenue growth > 12%||28.6%||Pass|
|Margins||Gross margin > 35%||54%||Pass|
|Net margin > 15%||10.1%||Fail|
|Balance sheet||Debt to equity < 50%||112.1%||Fail|
|Current ratio > 1.3||0.99||Fail|
|Opportunities||Return on equity > 15%||28.6%||Pass|
|Valuation||Normalized P/E < 20||17.91||Pass|
|Dividends||Current yield > 2%||3.2%||Pass|
|5-year dividend growth > 10%||12.6%||Pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, PepsiCo serves up a pretty fizzy financial picture. The drink maker has a decent amount of debt on its balance sheet, but consistent dividend growth has shareholders giving the company a toast.
PepsiCo has long played second fiddle to Coca-Cola (NYSE: KO ) , whose Coke and Diet Coke products take the top two spots in global sales. But unlike Coke and other beverage competitors such as Dr Pepper Snapple (NYSE: DPS ) and Hansen Natural (Nasdaq: HANS ) , PepsiCo also has its snack business, which includes the Frito-Lay brands.
Unfortunately, PepsiCo is facing higher commodity costs. That's nothing special, as beverage and food producers all face the same trends. But if the trend continues, it could prove troublesome for PepsiCo's bottom line.
Recent results present a mixed picture for PepsiCo. For its latest quarter, sales volume for beverages in its North American market fell by 1%. Yet when you look at emerging markets, you see a much different picture: PepsiCo posted double-digit sales growth in both India and China.
Whether PepsiCo heads toward perfection depends on how its current initiatives go. It paid up for a stake in Russian food-producer Wimm-Bill-Dann and is hoping that a new line of healthy snack products will establish a lasting trend. But at the very least, shareholders can get a nice dividend while they wait to see what will happen next.
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."