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 CLARCOR (NYSE: CLC ) 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 CLARCOR.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.7%||Fail|
|1-Year Revenue Growth > 12%||12.8%||Pass|
|Margins||Gross Margin > 35%||33.7%||Fail|
|Net Margin > 15%||10.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||2.1%||Pass|
|Current Ratio > 1.3||3.65||Pass|
|Opportunities||Return on Equity > 15%||14.8%||Fail|
|Valuation||Normalized P/E < 20||21.35||Fail|
|Dividends||Current Yield > 2%||0.9%||Fail|
|5-Year Dividend Growth > 10%||9.2%||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, CLARCOR hasn't yet filtered out all the imperfections in its financial statements. Even with reasonable recent sales growth, investors want more from the company.
CLARCOR makes filtration products for a variety of uses, including engine fluid systems, aircraft refueling, water recycling, and air conditioning. It's a somewhat smaller player in the industry than Pall (NYSE: PLL ) and Donaldson (NYSE: DCI ) , and its return on equity lags behind its competitors.
But CLARCOR has big plans for the future. With sales on the rise over the past year, CLARCOR is looking abroad for its biggest growth prospects. Revenue from China has jumped sharply, and the company also wants to strengthen its South American business.
Still, investors have wanted more from the company. Earlier this week, CLARCOR announced 13% higher earnings, but shares dropped sharply on the news as the figures fell short of expectations. Yet with the company keeping its guidance for the full year constant, optimists could infer that the company stands to make up for lost time in the rest of 2011.
CLARCOR shares are on the pricey side, as its earnings multiple is higher than those of Pall and Cummins (NYSE: CMI ) . That, combined with lackluster dividends, is holding the company from its full potential. Despite its being in a promising industry, CLARCOR doesn't look like it'll reach perfection in the near future.
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 the best investments from the rest.
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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."