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 Vulcan Materials (NYSE: VMC ) 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 Vulcan Materials.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(4.7%)||Fail|
|1-Year Revenue Growth > 12%||2.4%||Fail|
|Margins||Gross Margin > 35%||12%||Fail|
|Net Margin > 15%||(2.6%)||Fail|
|Balance Sheet||Debt to Equity < 50%||75.1%||Fail|
|Current Ratio > 1.3||1.91||Pass|
|Opportunities||Return on Equity > 15%||(1.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0.1%||Fail|
|5-Year Dividend Growth > 10%||(19.8%)||Fail|
|Total Score||1 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Vulcan Materials last year, the company hasn't been able to improve on its one-point score. A huge dividend cut hasn't helped the stock, but it looks possible that the shareholders may get bailed out by a takeover bid.
Vulcan sells aggregates, including sand, crushed rock, and gravel for use in construction projects. With the residential construction industry in particular having suffered greatly in recent years, Vulcan has struggled to keep its revenues up, as its five-year contraction shows. That's a story we've seen elsewhere in construction materials companies, with both USG (NYSE: USG ) and Texas Industries (NYSE: TXI ) having experienced similar drops in sales as big projects simply haven't been happening as much in the current environment.
One way that Vulcan attracted investors was through its dividend. But last October, the company slashed its dividend by 96% to just a penny per share in order to help get a new revolving credit facility. The move helps give Vulcan some liquidity, but the price is a high one for income-seeking shareholders.
Last December, though, Martin Marietta Materials (NYSE: MLM ) made an unsolicited takeover bid for Vulcan. Shares initially soared on the offer, in which Martin Marietta offered half a Martin Marietta share for every Vulcan share. But Vulcan management hasn't been particularly receptive to the offer, and both stocks have fallen dramatically this month as fears about whether the construction recovery is really firmly entrenched have made investors think twice about the industry.
Whether Vulcan will survive as an independent company depends a lot on Martin Marietta's proxy fight, as it hopes to put four directors on Vulcan's board at this year's June 1 annual shareholders meeting. As much as Vulcan has struggled, the stock could be a bargain if a true recovery in construction is at hand.
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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