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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 H&R Block (NYSE: HRB ) 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 H&R Block.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(0.5%)||Fail|
|1-Year Revenue Growth > 12%||8.2%||Fail|
|Margins||Gross Margin > 35%||36.7%||Pass|
|Net Margin > 15%||9%||Fail|
|Balance Sheet||Debt to Equity < 50%||128.1%||Fail|
|Current Ratio > 1.3||0.95||Fail|
|Opportunities||Return on Equity > 15%||47.8%||Pass|
|Valuation||Normalized P/E < 20||11.50||Pass|
|Dividends||Current Yield > 2%||4.9%||Pass|
|5-Year Dividend Growth > 10%||3.3%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at H&R Block last year, the company has kept the same four-point score. The stock, however, has had decent performance despite an up-and-down year for the company.
H&R Block is well-known as a preparer of tax returns. Yet live preparation has largely given way to tax software, presenting H&R Block with a conundrum in developing a long-term strategy. Moreover, given that HSBC (NYSE: HBC ) ended its agreement with H&R Block to finance refund-anticipation loans, one of the big draws for its services could be in jeopardy.
H&R Block had tried to muscle up against rival Intuit (Nasdaq: INTU ) and its TurboTax service by seeking to acquire TaxACT. But the Justice Department wouldn't allow that deal to go through because of the potential antitrust implications. Another problem has been that Sears Holdings (Nasdaq: SHLD ) , whose Sears stores have long housed tax-prep services, has been ailing. H&R Block also has some services available at select Wal-Mart (NYSE: WMT ) locations, though, so it isn't entirely dependent on Sears for its exposure to retail customers.
Late last year, the stock plunged after H&R Block announced earnings that missed expectations. But the better news was that the company had completed the sale of its RSM McGladrey consulting business, one of its non-core businesses that had drawn attention away from its primary tax-preparation services. In the long run, focusing on tax-prep seems like the best way for H&R Block to make the most of its well-known brand.
In the long run, for H&R Block to get closer to perfection, it needs to find a way to answer Intuit in the tax software realm. Without draws like refund-loans to pull in customers, H&R Block could be facing big problems going forward.
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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