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 Ecolab
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 Ecolab.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 6.1% | Fail |
| 1-Year Revenue Growth > 12% | 3.2% | Fail | |
| Margins | Gross Margin > 35% | 50.3% | Pass |
| Net Margin > 15% | 8.6% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 53.7% | Fail |
| Current Ratio > 1.3 | 1.14 | Fail | |
| Opportunities | Return on Equity > 15% | 25.9% | Pass |
| Valuation | Normalized P/E < 20 | 26.35 | Fail |
| Dividends | Current Yield > 2% | 1.3% | Fail |
| 5-Year Dividend Growth > 10% | 12.0% | Pass | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With three points, Ecolab doesn't look perfect. The company got some publicity last year because of some troubling trends at hotels, but that episode mostly served to bid shares up to expensive valuations.
Ecolab makes cleaning and sanitizing products for a variety of industries, including food service, hospitality, health-care, and commercial facilities. But it doesn't really compete directly with consumer-oriented companies like Clorox
That specialty came in handy during the bedbug scare, which affected not only hotels but also clothing retailer Abercrombie & Fitch
Even with that boost, the company hasn't shown a huge amount of growth. Given the pest problems that exist in emerging countries like India, you'd think Ecolab would have a global opportunity of impressive magnitude. But so far, Ecolab hasn't capitalized on that potential bull market.
With impressive dividend growth and good returns on equity, Ecolab has some things going for it. But shares have already made some sizable advances, making its earnings multiple fairly lofty. Investors may prefer to wait and see what happens next before counting on Ecolab to be the next perfect stock.
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 g o a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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