Growing up, you probably had a favorite baseball player. Being a Philadelphia native, mine was Mike Schmidt. Considered probably the best third baseman of all time, Schmidty led the league in home runs for eight seasons, RBIs for another four, and sits at number 14 on the all-time home run list.
He was a true slugger, and I loved every bit of him.
Was Schmidt really that good?
Like every baseball fan, I spouted off stats like they meant something, but as Michael Lewis points out in Moneyball, stats are deceiving in several ways. They magnify essentially small differences, they conflate circumstances with skill, and they're often looking at the wrong thing.
For example, we place absurd emphasis on stats like RBIs. While RBIs are considered an individual achievement, in order to knock runners in, runners have to be in scoring position. A booming triple won't earn any RBIs if the bases are empty.
And it turns out that metrics like RBIs are poor predictors of overall success. The metrics that matter, however -- on-base percentage and slugging percentage, especially in combination -- aren't very well known.
Johnny Bench? Reggie Jackson? They come to mind as some of the greatest players of all time, but what about Stan Musial? Or Mel Ott? Both of the latter players are significantly lesser known, yet their stats that matter are just as good or better. They're on the all-time list for walks, and consequently, they have higher OBPs than both Johnny Bench and Reggie Jackson. Oh -- and like Bench and Jackson, they have World Series rings as well.
I thought you were supposed to talk about stocks
The same problems with numbers happen in investing as they do in sports. The exciting, easy-to-find numbers often obscure the deeper stats that make the real difference between success and failure.
For instance, I often look for companies with low debt-to-equity ratios, substantial free cash flow, and forward growth rates above 12%. Both Best Buy (NYSE: BBY ) and Barnes & Noble (NYSE: BKS ) fit the above criteria. However, when I dig deeper, I find that both have steadily decreasing returns on equity and have had problems sustaining earnings growth. Low debt and positive free cash flow are excellent traits -- but they don't outweigh other problems.
If I'm looking for stable, dividend-producing stocks, I usually seek out companies with low multiples, high yields, and positive returns-on-equity. Progress Energy (NYSE: PGN ) , General Maritime (NYSE: GMR ) , and Pepco Holdings (NYSE: POM ) all look great on the surface -- until I realize they have payout ratios of 90%, 348%, and 91%, respectively. High payout ratios can be a great indicator of companies that are vulnerable to dividend cuts or that are living beyond their means.
The bottom line: On the surface, all of these companies look like home runs. But when you look at the numbers that really matter, they're companies you should be wary of.
The complete package
Hank Aaron has it all -- he's on the all-time home run list, he's on the all-time walk list, he has a World Series ring, and most importantly, he has an on-base percentage that rivals most. He's the complete package -- and you want the same from your stocks.
The experts at Motley Fool Stock Advisor use the same philosophy when recommending great stocks. They look for attractive valuations, clean balance sheets, and stable companies, but they also look at the whole picture -- just because a company has great cash flows doesn't necessitate a "buy." Just because a company pays extraordinary dividends doesn't mean it will continue to do so in the future. They keep digging statistic after statistic, until they find stocks that form a complete package.
For instance, Hasbro (NYSE: HAS ) has a five-year dividend growth rate of over 30% and has been paying dividends since 1981. The company has a low debt-to-capital ratio, has fantastic gross margins, and has consistently been increasing revenues over the last half decade. Stock Advisor recommended it in October, and it’s gone up by about 22% since that recommendation.
Tom and David Gardner, co-founders of the Motley Fool, recently advised members to buy NVIDIA (Nasdaq: NVDA ) , a company that provides the chips necessary for visual computing technology. NVIDIA has relationships with all the biggest companies and has its hand in everything from the newest smartphones to the latest PC configurations. The company has almost zero debt relative to cash, a low forward price-to-earnings ratio (it's cheap!), and has been increasing revenues over the last five years. NVIDIA finds itself at the crossroads of the new graphics revolution, and accordingly, analysts expect it to grow by at least 15% over the long-run.
If you want to outperform the market -- and Stock Advisor is outperforming the S&P 500 by an average of 52 percentage points per recommendation -- then you've got to find stocks that meet all of the important criteria, not just the most popular ones. If you'd like to see what else fits that bill, you can sign up for a free 30-day trial -- there's no obligation to subscribe. Just click here to get started.
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Fool contributor Jordan DiPietro owns shares of Hasbro. Best Buy is a Motley Fool Inside Value pick. Best Buy, Hasbro, and NVIDIA are Stock Advisor recommendations. The Fool owns shares of Best Buy and Hasbro. The Fool's disclosure policy can't wait for Roy Halladay to take the mound in his Phillies debut.
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