Is T. Rowe Price the Perfect Stock?

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 T. Rowe Price (Nasdaq: TROW  ) 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 T. Rowe Price.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 9.2% fail
  1-Year Revenue Growth > 12% 30.0% pass
Margins Gross Margin > 35% 100.0% pass
  Net Margin > 15% 28.0% pass
Balance Sheet Debt to Equity < 50% 0.0% pass
  Current Ratio > 1.3 3.24 pass
Opportunities Return on Equity > 15% 21.8% pass
Valuation Normalized P/E < 20 24.68 fail
Dividends Current Yield > 2% 1.8% fail
  5-Year Dividend Growth > 10% 18.2% pass
       
  Total Score   7 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 7, T. Rowe Price posts a very good showing. In fact, the company's performance shows how you can often make more money investing in a financial company's stock than in the investments that company sells.

T. Rowe Price manages financial assets, with nearly $440 billion under management. The company serves individuals and institutions alike. Unlike competitors Franklin Resources (NYSE: BEN  ) , Legg Mason (NYSE: LM  ) , and AllianceBernstein (NYSE: AB  ) , T. Rowe Price offers a huge selection of no-load funds to investors.

You might think that collecting sales charges would give T. Rowe Price's competitors a big advantage. But even without loads, T. Rowe Price has enjoyed strong growth in the past year with the stock market's advance, and pulls in attractive returns on equity without having any debt on its balance sheet. That combination has made shareholders happy. Over the past 20 years, the company's stock has performed amazingly, with average returns of more than 24% annually.

As with most fund managers, T. Rowe Price depends on strong financial markets for its fee revenue. But with investors looking to cut costs wherever they can, T. Rowe Price's no-load model should only gain in popularity in the years to come.

Keep searching
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.

Click here to add T. Rowe Price to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of T. Rowe Price and Legg Mason. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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