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 Equifax (NYSE: EFX ) 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 Equifax.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5%||Fail|
|1-Year Revenue Growth > 12%||6.4%||Fail|
|Margins||Gross Margin > 35%||61.3%||Pass|
|Net Margin > 15%||12.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||53.8%||Fail|
|Current Ratio > 1.3||1.74||Pass|
|Opportunities||Return on Equity > 15%||14.2%||Fail|
|Valuation||Normalized P/E < 20||21.94||Fail|
|Dividends||Current Yield > 2%||1.5%||Fail|
|5-Year Dividend Growth > 10%||32.8%||Pass|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Equifax last year, the company has lost a point. A higher valuation explains the score drop, but shareholders have gained 40% on their shares over the past year and so aren't upset about the move.
Equifax is best known for being one of three agencies that provide credit reports on consumers. Although its scoring isn't as well-known as rival Fair Isaac's (NYSE: FICO ) FICO score, Equifax provides vital credit information to lenders and other businesses.
But Equifax doesn't just handle credit. It also works with employers to help them verify income and past employment for job applicants. Although payroll companies Paychex (Nasdaq: PAYX ) and Automatic Data Processing (Nasdaq: ADP ) as well as HR consultant Towers Watson (NYSE: TW ) are big competitors in that space, the slow rebound in the U.S. economy has helped boost business opportunities for the entire industry.
New regulations, however, could hamper Equifax. The Consumer Financial Protection Bureau plans to start overseeing Equifax and its peers this fall, with a focus on ensuring information is accurate and that dispute resolution processes work. This ongoing supervision will be a sea change for the industry and could boost compliance costs.
For Equifax to improve, though, it needs to find ways to rein in those costs and look for growth opportunities. The stock's recent move to all-time highs certainly incorporates expectations of significant growth, but Equifax will need to deliver the goods if it wants to justify its valuation and get 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 the best investments from the rest.
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