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 Cintas (Nasdaq: CTAS ) 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 Cintas.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.0%||Fail|
|1-Year Revenue Growth > 12%||7.7%||Fail|
|Margins||Gross Margin > 35%||42.4%||Pass|
|Net Margin > 15%||7.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||60.1%||Fail|
|Current Ratio > 1.3||2.3||Pass|
|Opportunities||Return on Equity > 15%||13.4%||Fail|
|Valuation||Normalized P/E < 20||16.79||Pass|
|Dividends||Current Yield > 2%||1.4%||Fail|
|5-Year Dividend Growth > 10%||6.7%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Cintas last year, the company has picked up an extra point, with its valuation dropping a bit. But that hasn't held the stock back, with shares rising almost 30% over the past year.
Cintas is best known for its uniform rental business. With primarily smaller competitors Unifirst (NYSE: UNF ) and G&K Services (Nasdaq: GKSR ) vying for business in the space, Cintas has a dominant position in the industry, and it's done a good job of turning its leadership position into profits.
But Cintas has tried to diversify its business as well, with divisions covering first aid as well as document management. Those divisions haven't done nearly as well, given that they're up-and-comers in their respective spaces rather than leaders. Iron Mountain (NYSE: IRM ) in particular is a promising document management company, while Cintas has recently reported weakness in its document management division.
Earlier this week, Cintas posted mixed results, matching earnings expectations with an 11% gain in net income but falling short on revenue growth. But the company was cautious about its prospects for fiscal 2013, guiding earnings and revenue into a range that just barely contains analysts' estimates for both figures.
For Cintas to improve, it needs to continue looking for more successful ways to grow its revenue. Once employment starts to rebound, the company should get a fundamental boost that could help it get a bit closer 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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