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 Brady Corp. (NYSE: BRC ) 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 Brady.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||4%||Fail|
|1-year revenue growth > 12%||7%||Fail|
|Margins||Gross margin > 35%||48.5%||Pass|
|Net Margin > 15%||8.5%||Fail|
|Balance sheet||Debt to equity < 50%||33.9%||Pass|
|Current ratio > 1.3||2.64||Pass|
|Opportunities||Return on equity > 15%||10.4%||Fail|
|Valuation||Normalized P/E < 20||16.37||Pass|
|Dividends||Current yield > 2%||2.4%||Pass|
|5-year dividend growth > 10%||6.7%||Fail|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of five, Brady isn't making huge waves. But the little-known company has one record that makes thousands of other companies envious.
Brady isn't a household name, and its products aren't particularly glamorous. The company makes safety and security products, ranging from the ubiquitous exit and fire-escape signs present in just about every business in the nation, to ID systems that help identify both employees and products. With customers such as Hewlett-Packard (NYSE: HPQ ) relying on Brady for anti-counterfeit ID technology, Brady is sophisticated enough to do battle in a world where security and authenticity are essential.
But what sets Brady apart is its history of strong and growing dividends. Brady has increased its annual dividend payout for 26 straight years. But unlike CenturyLink (NYSE: CTL ) and Nucor (NYSE: NUE ) , Brady isn't a member of the S&P 500, so it doesn't qualify for the Dividend Aristocrat status that S&P companies with quarter-century payout track records get.
In its most recent quarter, Brady saw hugely positive results, with revenue and earnings both up more than expected. The news sent the shares up 5% for the day Friday. Yet even at those prices, the company is a lot cheaper on an earnings-multiple basis than Checkpoint Systems (NYSE: CKP ) , despite Brady's higher margins and faster revenue growth over the past year.
Brady can keep chugging along under the radar screen and make dividend investors quite happy. But to get closer to a perfect score, it would need to boost growth and net margins -- something that would be difficult for the company to do. Even if Brady never reaches perfection, however, it could still give investors good results over the long haul.
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."