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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 Ferro (NYSE: FOE ) 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 Ferro.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.6%||Fail|
|1-Year Revenue Growth > 12%||15.3%||Pass|
|Margins||Gross Margin > 35%||20.9%||Fail|
|Net Margin > 15%||1.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||55.6%||Fail|
|Current Ratio > 1.3||1.70||Pass|
|Opportunities||Return on Equity > 15%||7.3%||Fail|
|Valuation||Normalized P/E < 20||6.16||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of only three, Ferro doesn't look too special. The specialty chemical maker producer trades at a super-cheap valuation, but its returns on equity and razor-thin margins don't leave much room for error.
Ferro makes a variety of materials and chemicals for many different industries. Examples include ink for digital printing on ceramic tiles, materials for solar cells, and metal powders used in consumer electronics. Its biggest competitor is PPG Industries (NYSE: PPG ) , but smaller companies like Chemtura (Nasdaq: CHMT ) also have niches in the industry.
As you'd expect, Ferro is very dependent on the business cycle for its success. During the financial crisis in 2008 and early 2009, Ferro looked a lot worse off, but since then, the company has done a good job cutting debt and getting back to profitability. Although shareholders are likely disappointed that the company hasn't attracted the takeover attentions of an industry giant like Dow Chemical (NYSE: DOW ) or DuPont (NYSE: DD ) , shares recovered nicely from their 2009 lows.
More recently, though, Ferro has given back most of those gains. In April, the stock fell after what seemed to be a positive earnings report that came with a boost in guidance. Yet by early August, it appeared that the ailing solar market had taken its toll on Ferro. With analysts now bailing on the chemical company -- as well as peers Kraton Performance (NYSE: KRA ) and PolyOne (NYSE: POL ) , shares may be at a low point.
Ferro's valuation makes it an interesting value play on the economic cycle. If you think that we're heading back to recession, then Ferro won't look perfect for a while. But if a slow economy is just a head-fake, then it could be the perfect time to buy.
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 Ferro 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.