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 DuPont (NYSE: DD ) 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 DuPont.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||2.4%||fail|
|1-Year Revenue Growth > 12%||17.8%||pass|
|Margins||Gross Margin > 35%||29.1%||fail|
|Net Margin > 15%||9.9%||fail|
|Balance Sheet||Debt to Equity < 50%||134.7%||fail|
|Current Ratio > 1.3||2.10||pass|
|Opportunities||Return on Equity > 15%||36.8%||pass|
|Valuation||Normalized P/E < 20||17.66||pass|
|Dividends||Current Yield > 2%||3.5%||pass|
|5-Year Dividend Growth > 10%||2.6%||fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
DuPont clocks in with an average score of 5. Although the company pays a nice dividend, it has struggled to get through the recession.
DuPont is known as a chemical manufacturer, focusing primarily on agricultural and nutritional products. That puts the company up against not just fellow diversified chemical competitor Dow Chemical (NYSE: DOW ) but also more specialized ag company Monsanto (NYSE: MON ) . Times have been good for the industry lately, as Dow has seen many of its business segments post double-digit sales gains lately.
But where DuPont's business has struggled lately is in its pharmaceutical segment, which contributed nearly a third of its pre-tax operating profit in 2009. With two of its drugs coming off patent, DuPont saw year-over-year earnings fall 11% in its most recent quarter. Still, the company predicted higher-than-expected profits for the full year.
For investors seeking income, DuPont's dividend both is significant and looks safe, although the company hasn't grown its payout very quickly. If DuPont can cut its debt and keep looking for ways to cut costs and improve margins, then it could rise out of the middle of the pack.
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.
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