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 Pearson (NYSE: PSO ) 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 Pearson.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9.1%||Fail|
|1-Year Revenue Growth > 12%||10.2%||Fail|
|Margins||Gross Margin > 35%||54.3%||Pass|
|Net Margin > 15%||22.9%||Pass|
|Balance Sheet||Debt to Equity < 50%||41.2%||Pass|
|Current Ratio > 1.3||1.86||Pass|
|Opportunities||Return on Equity > 15%||10.2%||Fail|
|Valuation||Normalized P/E < 20||21.76||Fail|
|Dividends||Current Yield > 2%||3.4%||Pass|
|5-Year Dividend Growth > 10%||7.5%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Pearson scores a mid-range five points. The educational publisher has gotten a lot of the benefit from increasing interest in education without hitting some of the hurdles that other companies have faced.
Pearson is a U.K.-based diversified media company. It owns the Financial Times and Penguin Books, but the lion's share of Pearson's revenue comes from supplying teachers and students around the world with schoolbooks, technology, and other learning materials.
As fellow Fool Aimee Duffy recently pointed out, the company compares well against fellow publisher McGraw-Hill (NYSE: MHP ) and for-profit education giant Apollo Group (Nasdaq: APOL ) . And while fellow publishers John Wiley & Sons (NYSE: JW-A ) and Scholastic (Nasdaq: SCHL ) have struggled to widen their margins, Pearson's net margin of almost 23% is the envy of the industry.
Despite being based abroad, Pearson is dedicated to serving the U.S. market. Recently, it announced it was acquiring Schoolnet, which serves 5 million American students and should help Pearson establish its U.S. presence even more strongly.
It's clear that education is a key component of America's future, yet much of the for-profit educational sector has been plagued by concerns over government regulation. Although it's not perfect, Pearson steers well clear of that controversy, giving investors a pure play into the future of education not just here but around the world.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."