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 Boston Beer (NYSE: SAM ) 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 Boston Beer.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.7%||Fail|
|1-Year Revenue Growth > 12%||11.1%||Fail|
|Margins||Gross Margin > 35%||56.1%||Pass|
|Net Margin > 15%||13.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||1.96||Pass|
|Opportunities||Return on Equity > 15%||37.8%||Pass|
|Valuation||Normalized P/E < 20||25.85||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Boston Beer last year, the company has kept its four-point score. But better margins and slightly faster growth bode well for the beer maker, as its roughly 30% rise in stock price over the past year shows.
Boston Beer is a prime example of how the beer industry has changed in recent years. Although total volume of beer sales in the U.S. has dropped by more than 1% in both 2010 and 2011, craft beers have taken the industry by storm, posting double-digit volume growth in each of the past two years. As a result, popular beers like Anheuser-Busch InBev's (NYSE: BUD ) Budweiser and Molson Coors' (NYSE: TAP ) Coors line are taking a backseat to beers like Yuengling and Boston Beer's Sam Adams Lager in terms of brand value and quality.
When it comes to craft beer, Boston Beer is the king. It dwarfs Craft Brewers Alliance (Nasdaq: BREW ) , which had less than a third of the volume Boston Beer produced last year. Yet the Sam Adams-maker has plenty of room to grow, as it has captured only about 1% of the overall beer market.
Of course, big beer companies aren't dumb. Molson Coors and SABMiller are now producing Blue Moon, while spirits specialist Diageo (NYSE: DEO ) has also moved into the industry with its Kilkenny and Smithwick's brews. Yet with a big head start and a CEO with a true passion for brewcraft, Boston Beer still has a clear advantage.
For Boston Beer to keep improving, it needs to focus on growth as well as keeping its margins up. If it can do that, the company should have clear sailing to rise toward perfection steadily in the coming years.
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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