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 Newell Rubbermaid
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 Newell Rubbermaid.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 0.2% | Fail |
| 1-Year Revenue Growth > 12% | 1.3% | Fail | |
| Margins | Gross Margin > 35% | 38.1% | Pass |
| Net Margin > 15% | 5.4% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 124.2% | Fail |
| Current Ratio > 1.3 | 1.15 | Fail | |
| Opportunities | Return on Equity > 15% | 16.1% | Pass |
| Valuation | Normalized P/E < 20 | 11.90 | Pass |
| Dividends | Current Yield > 2% | 2.1% | Pass |
| 5-Year Dividend Growth > 10% | (25.0%) | Fail | |
| Total Score | 4 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just four points, Newell Rubbermaid isn't storing up perfection. The home storage company may be a frequent seller to my household, but it's apparently having trouble meeting shareholder expectations.
Newell Rubbermaid is best known for its Rubbermaid storage containers, where the company competes against Tupperware Brands
But Newell has had a much tougher time during the recession than most of its competitors. Revenue growth has come to a near standstill, and the company had to slash its dividend during the financial crisis. Yet since the March 2009 lows, shares of Newell have more than tripled.
Just last week, though, the stock fell sharply after Newell cut its guidance for 2011. By taking a percentage point off its revenue growth estimate and clipping its earnings forecast by around 4%, investors gave shares a 10% haircut.
The good news, though, is that shares now trade at very attractive valuations. Obviously, the company needs to get its growth back in order to justify even its currently low earnings multiple. But even though its business isn't the most exciting in the world, Newell Rubbermaid has plenty of potential to improve in the future.
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 Newell Rubbermaid to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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."
