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 Georgia Gulf (NYSE: GGC ) 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 Georgia Gulf.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.4%||Fail|
|1-Year Revenue Growth > 12%||8.5%||Fail|
|Margins||Gross Margin > 35%||10.1%||Fail|
|Net Margin > 15%||2.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||112.3%||Fail|
|Current Ratio > 1.3||2.44||Pass|
|Opportunities||Return on Equity > 15%||15.7%||Pass|
|Valuation||Normalized P/E < 20||22.38||Fail|
|Dividends||Current Yield > 2%||0.9%||Fail|
|5-Year Dividend Growth > 10%||(60.2%)||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Georgia Gulf last year, the company has seen its score cut in half. Weaker revenue growth played a role in the drop, but the explosion in the share price has pushed valuations much higher, with the stock having almost doubled in the past year.
Georgia Gulf makes a variety of industrial chemicals, including materials for construction and home improvement. But most of the focus on the company over the past year has been merger-related, as Westlake Chemical (NYSE: WLK ) made a bid for the company back in January. After a long series of back-and-forth offers and rejections, Westlake finally dropped its bid in May.
More recently, though, Georgia Gulf has made a promising strategic move. Last month, it announced that it would merge with the commodity chemicals division of PPG Industries (NYSE: PPG ) , creating a bigger company that should be better able to compete in the industry. Although higher debt levels could result, Georgia Gulf's bond rating may actually improve due to the increase in its size after the merger.
The problem for investors looking to get in right now is that Georgia Gulf's share price has sent its valuation soaring. By contrast, peers Dow Chemical (NYSE: DOW ) and Olin (NYSE: OLN ) trade at much more attractive earnings multiples. In order for Georgia Gulf to justify its pricier stock, it will need the PPG deal to go well.
For Georgia Gulf to improve, it must use its PPG opportunity to renew growth and bolster its financials. Despite its promise, Georgia Gulf has a long way to go before it would start looking like a perfect stock.
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.
Georgia Gulf may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Georgia Gulf to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.