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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 Avery Dennison (NYSE: AVY ) 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 Avery Dennison.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||4%||Fail|
|1-year revenue growth > 12%||5.7%||Fail|
|Margins||Gross margin > 35%||27.3%||Fail|
|Net margin > 15%||4.5%||Fail|
|Balance sheet||Debt to equity < 50%||86.8%||Fail|
|Current ratio > 1.3||1.14||Fail|
|Opportunities||Return on equity > 15%||18.5%||Pass|
|Valuation||Normalized P/E < 20||12.87||Pass|
|Dividends||Current yield > 2%||3.7%||Pass|
|5-year dividend growth > 10%||(10.3%)||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only three points, Avery Dennison hasn't supplied a lot of strength for investors. The office products supplier hasn't seen much good news come even from an improving economy.
The recession didn't do any favors to companies that cater to other businesses. Retailers OfficeMax (NYSE: OMX ) and Office Depot (NYSE: ODP ) have seen sales contractions over the past five years, while even industry darling Staples (Nasdaq: SPLS ) has had to deal with razor-thin margins and subpar returns on equity. For the office retailers at least, the most recent quarter has suggested that a turnaround may be in place.
That isn't holding true for Avery, though. Last month, Avery warned that its earnings wouldn't be as good as analysts were expecting. Combined with a big drop in revenue projections, the news was enough to send shares plummeting and raised the question of whether the company wouldn't be better off as a takeover candidate from 3M (NYSE: MMM ) or another suitor.
What Avery has going for it is a strong dividend yield, which beats out both 3M and competitor Bemis (NYSE: BMS ) despite Avery's dividend cut a couple years back. But without a recovery in its core business, Avery is going to have a really tough time bouncing back to become a perfect stock.
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 Avery Dennison 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.