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 NewMarket (NYSE: NEU ) 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 NewMarket.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.6%||Fail|
|1-Year Revenue Growth > 12%||15.4%||Pass|
|Margins||Gross Margin > 35%||26.7%||Fail|
|Net Margin > 15%||10.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||42.3%||Pass|
|Current Ratio > 1.3||3.09||Pass|
|Opportunities||Return on Equity > 15%||39.4%||Pass|
|Valuation||Normalized P/E < 20||16.81||Pass|
|Dividends||Current Yield > 2%||1.3%||Fail|
|5-Year Dividend Growth > 10%||40.1%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at NewMarket last year, the company has gained a point. A slight reduction in debt-to-equity gave the chemical stock the score boost, but what's really made shareholders happy is the stock's 30% gain in the past year.
NewMarket focuses on a fairly specialized business, making chemicals that work as additives to fuel as well as to engine lubricants. The company does a significant portion of its business with Royal Dutch Shell (NYSE: RDS-A ) , which accounted for 11% of its revenue in 2011. Yet oddly enough, NewMarket also has a small real-estate business, with 64 acres of property in Richmond, Va., that it leases out to MeadWestvaco (NYSE: MWV ) .
Unfortunately, competitors abound in the industry. Berkshire Hathaway (NYSE: BRK-B ) -owned Lubrizol is arguably NewMarket's closest rival, but joint ventures between ExxonMobil (NYSE: XOM ) and Shell as well as Chevron also give NewMarket a run for its money.
But even in the face of competition, NewMarket has been performing quite well. In its most recent quarter, revenue grew nearly 11% while net income increased to almost $5 per share, beating estimates and sending shares soaring. Yet even after the gains, the stock still trades at a reasonable earnings multiple.
For NewMarket to keep improving, continuing its strong revenue growth is the clear next step. Higher margins will be tough in a competitive industry, but it may prove to be the move that eventually gets NewMarket to perfection.
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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