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 Cintas
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 Cintas.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 2.3% | Fail |
| 1-year revenue growth > 12% | 7.4% | Fail | |
| Margins | Gross margin > 35% | 42.2% | Pass |
| Net margin > 15% | 6.5% | Fail | |
| Balance sheet | Debt to equity < 50% | 55.9% | Fail |
| Current ratio > 1.3 | 3.92 | Pass | |
| Opportunities | Return on equity > 15% | 10.2% | Fail |
| Valuation | Normalized P/E < 20 | 20.24 | Fail |
| Dividends | Current yield > 2% | 1.6% | Fail |
| 5-year dividend growth > 10% | 7.0% | Fail | |
| Total Score | 2 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just two points, Cintas isn't cleaning up on our scorecard. The uniform company has an interesting niche, but lately, it's been the victim of corporate cost-cutting at the small-business level.
If you've ever seen a worker in uniform, Cintas may well be the company that made it. The company dominates the competition in uniform rental and sales, with much higher revenue than the smaller UniFirst
But there's more to Cintas than uniforms. The company also has exposure to the safety and fire protection industry as well as handling document management. Those businesses represent only a small piece of Cintas' overall sales, and the company faces competitors such as Tyco International
Even with that minimal diversity in its businesses, Cintas is still vulnerable to tough economic times, as many customers can cut back on uniform costs more easily than on more vital operational expenses. But as the economy seems to improve, Cintas may finally start to benefit. Just yesterday, shares rose more than 10% as the company beat estimates on revenue and earnings. More importantly, Cintas raised guidance going forward, pointing to an improving job market to boost annual earnings per share toward the $2 level.
Still, investors seeking the perfect stock might do better looking elsewhere. With shares fetching more than 20 times earnings, Cintas isn't cheap -- and with the threat of a fall back into recession, counting on cyclicality to pull Cintas up entails quite a bit of risk.
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 Cintas 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.
