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 Leggett & Platt (NYSE: LEG ) 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 Leggett & Platt.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3.1%)||Fail|
|1-Year Revenue Growth > 12%||8.2%||Fail|
|Margins||Gross Margin > 35%||18.4%||Fail|
|Net Margin > 15%||4.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||66.4%||Fail|
|Current Ratio > 1.3||2.09||Pass|
|Opportunities||Return on Equity > 15%||11.0%||Fail|
|Valuation||Normalized P/E < 20||22.22||Fail|
|Dividends||Current Yield > 2%||4.9%||Pass|
|5-Year Dividend Growth > 10%||10.4%||Pass|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Leggett & Platt last year, the furniture maker has kept its three-point score. Sluggishness in the economy has continued to weigh on results, even though the company has seen some minor improvement recently.
Furniture and building products may not seem like the best place to invest lately. In the furniture area, high costs of materials have hampered both Leggett and competitor La-Z-Boy (NYSE: LZB ) , even as revenue has been on the increase. In response to those competitive pressures, both La-Z-Boy and Ethan Allen Interiors (NYSE: ETH ) have boosted their promotional and advertising activity, putting even more pressure on Leggett.
But Leggett & Platt has made it through tough times before. As a Dividend Aristocrat, the company has increased its dividends annually for 40 years, putting it among the elite dividend stocks of the S&P 500.
Moreover, Leggett's other businesses may start pulling their weight more. Its industrial materials and specialized products segments had strong growth in 2011, although higher steel prices were responsible for much of the higher revenue from the industrial business.
In the long run, Leggett will benefit from a stronger economy. Just as high-end mattress-makers Select Comfort (Nasdaq: SCSS ) and Tempur-Pedic (NYSE: TPX ) have soared with prospects of the housing market coming back and consumers getting ready to shop again, Leggett could also prosper from more cash-rich customers. Once things get back to normal, Leggett should start looking a lot more like a perfect stock.
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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