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 Vector Group (NYSE: VGR ) 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 Vector Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.8%||Fail|
|1-Year Revenue Growth > 12%||17.8%||Pass|
|Margins||Gross Margin > 35%||39.8%||Pass|
|Net Margin > 15%||12.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||NM||NM|
|Current Ratio > 1.3||1.84||Pass|
|Opportunities||Return on Equity > 15%||NM||NM|
|Valuation||Normalized P/E < 20||30.82||Fail|
|Dividends||Current Yield > 2%||8.9%||Pass|
|5-Year Dividend Growth > 10%||5.1%||Fail|
|Total Score||4 out of 8|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Vector Group has negative shareholder equity. Total score = number of passes.
With four points, Vector Group isn't heating up the joint with its financials. The tobacco company may not be the best-known in its industry, but it has ridden the same long-term wave to good share performance.
Vector is the company behind cigarette brands like USA and Pyramid. It's a tiny company compared to giants Altria (NYSE: MO ) , Lorillard (NYSE: LO ) , and Reynolds American (NYSE: RAI ) , but it has enjoyed much faster revenue growth than those competitors recently, and Vector also pays a much higher dividend yield that has gotten the attention of many investors.
Those dividends, however, greatly exceed Vector's earnings, which is one reason why the company has negative shareholder equity. Unlike Philip Morris International (NYSE: PM ) , Vector does all of its business in the U.S. market, which leaves it exposed to U.S. regulation and lawsuit liability. All of those factors make many people concerned about whether Vector can sustain its payout.
With new regulatory initiatives like in-your-face graphic anti-smoking labels coming next year, Vector faces a hostile environment for the foreseeable future. As the company having had to raise debt to finance its dividend, shareholders shouldn't expect Vector to become a perfect stock anytime soon.
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."