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 Weyerhaeuser (NYSE: WY ) 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 Weyerhaeuser.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(17.9%)||Fail|
|1-Year Revenue Growth > 12%||3.2%||Fail|
|Margins||Gross Margin > 35%||16.8%||Fail|
|Net Margin > 15%||4.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||106.4%||Fail|
|Current Ratio > 1.3||3.37||Pass|
|Opportunities||Return on Equity > 15%||5.9%||Fail|
|Valuation||Normalized P/E < 20||96.09||Fail|
|Dividends||Current Yield > 2%||2.6%||Pass|
|5-Year Dividend Growth > 10%||(23.6%)||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Weyerhaeuser last year, the company has dropped three full points. Falling revenue growth and margins are largely responsible for the score plunge, but shareholders aren't too concerned as the stock has jumped about 10% in the past year.
Weyerhaeuser is a specialist in timber and forest products. Increasingly, investors have turned to timber investments as a way to increase diversification and earn steady income. That popularity may have led Weyerhaeuser to convert to a real estate investment trust two years ago, given that competitors Rayonier (NYSE: RYN ) , Potlatch (NYSE: PCH ) , and Plum Creek Timber (NYSE: PCL ) were already established as REITs. The conversion gave Weyerhaeuser some tax benefits that have flowed through to shareholders.
Timber prices tend to move in line with the economy, so recent global economic concerns gave Weyerhaeuser a temporary hit. But it's important to understand that like International Paper (NYSE: IP ) , Weyerhaeuser still gets the majority of its revenue from its paper and wood products business rather than raw timber sales.
But analysts have been mixed about Weyerhaeuser. Citigroup upgraded the stock earlier this month, citing better potential demand from the rebounding housing market. But DA Davidson downgraded the stock, pointing to adverse commodity price movements that could hurt its net income.
To improve, Weyerhaeuser needs to look for growth engines as well as finding ways to boost its dividend to compete better with its higher-yielding timber REIT peers. As a long-term play, though, Weyerhaeuser has plenty of potential to become a perfect stock as the economic cycle turns.
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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