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 Quad/Graphics (NYSE: QUAD ) 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 Quad/Graphics.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||23.9%*||Pass|
|1-Year Revenue Growth > 12%||87.5%||Pass|
|Margins||Gross Margin > 35%||23.4%||Fail|
|Net Margin > 15%||(0.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||118.8%||Fail|
|Current Ratio > 1.3||1.44||Pass|
|Opportunities||Return on Equity > 15%||0.5%||Fail|
|Valuation||Normalized P/E < 20||5.70||Pass|
|Dividends||Current Yield > 2%||5.6%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Quad/Graphics started paying a dividend in May 2011. *3.75-year growth rate. Total score = number of passes.
With five points, Quad/Graphics prints up a reasonable score. The company's stock has been on a roller-coaster ride of late, as investors try to weigh whether the company has growth potential or is doomed to join buggy-whip makers and other obsolescent technology.
Quad/Graphics specializes in providing print services to businesses. In an era in which digital distribution has made hard copy out of style, the entire print industry has struggled. Quad/Graphics has had to fight back against initiatives from R.R. Donnelley (Nasdaq: RRD ) and its interactive print business, but both companies, as well as Cenveo (NYSE: CVO ) , Consolidated Graphics (NYSE: CGX ) , and Vistaprint (Nasdaq: VPRT ) , have had their own obstacles to overcome.
Investors seem to have a lot of mixed feelings about Quad/Graphics. On one hand, hedge fund manager John Paulson continues to have confidence in the stock, holding onto his million-share position in the company throughout the third quarter. Yet just last week, Quad/Graphics lost a quarter of its value when its earnings fell short of expectations. It also issued negative guidance for the remainder of the year.
Perhaps the strangest thing about the company is that it initiated a huge dividend earlier this year even while it has been losing money. That makes its yield appealing to investors, but without the earnings to back it up, it's simply not sustainable. Combined with the company's debt load, Quad/Graphics needs to figure out how to turn its revenue into profits in a hurry -- or else it will fade away from perfection slowly but surely.
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."