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 Rite Aid (NYSE: RAD ) 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 Rite Aid.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.6%||Fail|
|1-Year Revenue Growth > 12%||(0.2%)||Fail|
|Margins||Gross Margin > 35%||26.4%||Fail|
|Net Margin > 15%||(1.7%)||Fail|
|Balance Sheet||Debt to Equity < 50%||NM||NM|
|Current Ratio > 1.3||1.83||Pass|
|Opportunities||Return on Equity > 15%||NM||NM|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 7|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Rite Aid had negative earnings and shareholder equity during the period. Total score = number of passes.
When we looked at Rite Aid last year, it had exactly the same score of a single point. Clearly, the past year hasn't done much to help the drugstore retailer's prospects.
Over the past year, Rite Aid has mostly continued its long streak of subpar results. Despite some brief glimmers of hope earlier this year, Rite Aid continues to lag behind Walgreen (NYSE: WAG ) and CVS Caremark (NYSE: CVS ) with falling sales and a lack of profitability.
Rite Aid is trying to make things better. Its Wellness Plus customer rewards program has been successful in building membership and driving sales of cosmetics, food, and prescriptions. Moreover, the company is remodeling stores and planning to expand its co-branded SUPERVALU (NYSE: SVU ) Save-A-Lot Rite Aid store concept.
One possible exit strategy could be for Rite Aid to put itself up for sale. Fellow Fool Adam Crawford speculated that Wal-Mart (NYSE: WMT ) might be interested in buying Rite Aid to help implement its small-store concept.
Absent such a lifeline, though, Rite Aid has a lot of work to do just to survive in a difficult environment. As far as perfection is concerned, the company needs to turn itself around first before anyone will seriously expect superior results from Rite Aid.
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.
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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."