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 Walgreen
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 Walgreen.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 8.8% | Fail |
| 1-Year Revenue Growth > 12% | 7.1% | Fail | |
| Margins | Gross Margin > 35% | 28.4% | Fail |
| Net Margin > 15% | 3.8% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 16.2% | Pass |
| Current Ratio > 1.3 | 1.52 | Pass | |
| Opportunities | Return on Equity > 15% | 18.6% | Pass |
| Valuation | Normalized P/E < 20 | 11.72 | Pass |
| Dividends | Current Yield > 2% | 2.8% | Pass |
| 5-Year Dividend Growth > 10% | 22.4% | Pass | |
| Total Score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Walgreen last year, the drugstore retailer has picked up two points. With continued dividend growth and improvements on returns on equity, Walgreen is working its way closer to perfection.
Walgreen has made steady progress in growing income over the past decade, even though its share price hasn't advanced much. That's helped push the drugstore retailer down to a point at which its shares look extremely attractive.
Despite share weakness, Walgreen has actually been posting some pretty strong financial results. In its most recent quarter, same-store sales rose 4.4%, beating rivals CVS Caremark
But concerns over pharmacy benefits management relationships are weighing down the company right now. Rather than competing against CVS, Walgreen sold off its PBM business to Catalyst Health
For shareholders, Walgreen not only pays a dividend approaching 3% but has also authorized a $2 billion stock buyback earlier this year. Given that drug retail is a low-margin business, it's improbable that Walgreen will ever reach true perfection. But with some help, improving growth numbers is a goal that could be within reach.
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 the best investments from the rest.
Click here to add Walgreen 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 ."
