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 Avon Products (NYSE: AVP ) 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 Avon Products.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.2%||Fail|
|1-Year Revenue Growth > 12%||3.9%||Fail|
|Margins||Gross Margin > 35%||63.4%||Pass|
|Net Margin > 15%||4.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||209.1%||Fail|
|Current Ratio > 1.3||1.42||Pass|
|Opportunities||Return on Equity > 15%||32.3%||Pass|
|Valuation||Normalized P/E < 20||14.45||Pass|
|Dividends||Current Yield > 2%||4.2%||Pass|
|5-Year Dividend Growth > 10%||5.6%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Avon Products last year, the company has kept its five-point score. The consumer-products seller hasn't performed well and has most of the same challenges it faced last year, but action on the acquisition front has recently reawakened interest in the company.
Avon has faced big struggles in recent years. It has seen its U.S. business dwindle, which has put a damper on its overall growth and kept it from reaching many of its financial goals. Moreover, competition from cosmetics sellers Ulta Salon (Nasdaq: ULTA ) and Estee Lauder (NYSE: EL ) has ramped up dramatically. With two ongoing SEC investigations looking into separate allegations of misconduct at Avon, the departure of longtime CEO Andrea Jung gives the company a chance at a fresh start.
But Avon also has some attractive qualities. The company does a huge amount of business in Latin America and the emerging economies of Eastern and Central Europe. With consumer giants Procter & Gamble (NYSE: PG ) and Kimberly-Clark (NYSE: KMB ) focusing ever-increasing amounts of attention on their international sales, Avon already has a solid foundation in those areas -- and could build on it if the company can start executing better there.
Those qualities are likely what prompted Avon rival Coty to make a $10 billion bid for the company. Avon quickly turned down the offer, suggesting that it believes incoming CEO Sherilyn McCoy can turn Avon around.
For Avon to start moving up, it needs to demonstrate that it hasn't made a huge mistake by turning down Coty's offer. New blood in the executive suite could help, but with a large debt load and a thin profit margin, Avon will face an uphill battle in its turnaround attempt.
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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