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 (NYSE: WAG ) 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 Walgreen.
What We Want to See
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 (NYSE: CVS ) and Rite Aid (NYSE: RAD ) .
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 (Nasdaq: CHSI ) earlier this year, allowing Walgreen to focus on its retail stores. But an ongoing disagreement with Express Scripts (Nasdaq: ESRX ) over payment terms led to Walgreen choosing to terminate its contract with Express Scripts as of the beginning of 2012. With Express planning to buy Medco Health Solutions (NYSE: MHS ) , the fallout from the dispute could be far-reaching and have a big impact on Walgreen's numbers.
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.
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."