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 Herman Miller (Nasdaq: MLHR ) 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 Herman Miller.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(1.0%)||Fail|
|1-Year Revenue Growth > 12%||25.1%||Pass|
|Margins||Gross Margin > 35%||32.6%||Fail|
|Net Margin > 15%||4.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||125.1%||Fail|
|Current Ratio > 1.3||1.76||Pass|
|Opportunities||Return on Equity > 15%||49.7%||Pass|
|Valuation||Normalized P/E < 20||23.40||Fail|
|Dividends||Current Yield > 2%||0.4%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With only three points, Herman Miller isn't giving shareholders a comfortable ride. After a recession that hit businesses hard, it's not surprising to see the office equipment maker's growth hit a big speed bump, but things seem to be on the upswing now.
Herman Miller is famous for the Aeron chair, which many see as the standard for ergonomic excellence. The company makes a wide range of office furniture products, including modular systems, storage products, and even an energy-management infrastructure for offices.
Unfortunately, the struggling economy hit the business hard. Like competitors Steelcase (NYSE: SCS ) and HNI (NYSE: HNI ) , Herman Miller has seen sales fall over the past five years. Only Knoll (NYSE: KNL ) managed to beat the bust, and that by a minuscule 0.2% annual gain in revenue since 2006.
But as the economy improves, Herman Miller's results have followed suit. Just yesterday, the company announced a 37% jump in sales and saw earnings more than double. Product orders were up 21%, and the company believes the future should remain bright into next year.
Herman Miller still has plenty of work to do to improve its financials, including reducing debt and hopefully boosting its dividend above its current token payout. Most of its competitors have much higher dividend yields. If it can keep up its recent earnings momentum, though, Herman Miller could quickly move much closer to perfection in the years to come.
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 Herman Miller 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.