Is Stanley Black & Decker the Perfect Stock?

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 Stanley Black & Decker (NYSE: SWK  ) 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 Stanley Black & Decker.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

21.7%

Pass

 

1-Year Revenue Growth > 12%

76.9%

Pass

Margins

Gross Margin > 35%

36.9%

Pass

 

Net Margin > 15%

6.3%

Fail

Balance Sheet

Debt to Equity < 50%

49%

Pass

 

Current Ratio > 1.3

1.57

Pass

Opportunities

Return on Equity > 15%

8.7%

Fail

Valuation

Normalized P/E < 20

15.96

Pass

Dividends

Current Yield > 2%

3%

Pass

 

5-Year Dividend Growth > 10%

5.3%

Fail

       
 

Total Score

 

7 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With seven points, Stanley Black & Decker is helping investors build a pretty portfolio. The combination of the two toolmakers has proven to be a strong pairing that has brought real benefits to shareholders.

Following its 2010 merger, Stanley Black & Decker now represents the surviving entity from the former Stanley Works and Black & Decker. That combination has resulted in some strong cost savings, which the company handed out to shareholders in the form of a 20% dividend increase earlier this year, bolstering its status as a dividend aristocrat with a long streak of hikes over the years.

Yet the company isn't perfect. Snap-on Tools (NYSE: SNA  ) has better returns on equity and margins, although it achieves them in part through greater leverage. The retailers Stanley Black & Decker depends on for its sales -- which include Home Depot (NYSE: HD  ) , Lowe's (NYSE: LOW  ) , and Sears Holdings (Nasdaq: SHLD  ) -- have faced their own struggles with the housing bust and the slow economy.

Nevertheless, what Stanley Black & Decker enjoys is the fact that its products are consistently in demand. Whether you're a construction worker building a new home or a homeowner trying to fix yours up, you'll need the same tools -- and Stanley will be there to provide them for you. If the economy eventually picks up, then that should only help the company move closer to perfection.

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 Stanley Black & Decker 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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Lowe's and Home Depot as well as writing covered calls on Lowe's. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 25, 2011, at 11:12 AM, WILD911 wrote:

    Guidance re: imput on how to prioritize and scale the maze of metrics is very useful to this newbie. The 10 metrics suggested here seem to have common sense relevance. However, the descriptions/names of the metrics don't nicely match up w/the Metric names/metric values generated in MFool data. I could only find 2 of 10 matches ("Current Ratio","Debt to Equity" ) for SWK data, so it's hard to generalize recommended metrics in evaluating other companies. For example, I couldn't find "Normalized P/E" after fairly diligent search. For example, 5 yr annual growth =15.74 using Mfool generated data, not 21.7 as in article.

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