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 Avery Dennison
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 Avery Dennison.
Factor |
What We Want to See |
Actual |
Pass or Fail? |
---|---|---|---|
Growth |
5-Year Annual Revenue Growth > 15% |
0.8% |
Fail |
1-Year Revenue Growth > 12% |
6.3% |
Fail |
|
Margins |
Gross Margin > 35% |
25.3% |
Fail |
Net Margin > 15% |
3.0% |
Fail |
|
Balance Sheet |
Debt to Equity < 50% |
87.5% |
Fail |
Current Ratio > 1.3 |
1.13 |
Fail |
|
Opportunities |
Return on Equity > 15% |
9.6% |
Fail |
Valuation |
Normalized P/E < 20 |
19.85 |
Pass |
Dividends |
Current Yield > 2% |
3.4% |
Pass |
5-Year Dividend Growth > 10% |
(8.1%) |
Fail |
|
Total Score |
2 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Avery Dennison last year, the company has lost a point. That said, shareholders aren't too disappointed with the stock; it has risen around 15% in the past year.
Avery Dennison has faced some substantial challenges because of the tough economy. With Europe in decline, demand for the company's products, which include packaging materials, adhesives, and industrial materials, has been fairly weak in recent years. Analysts are projecting a decline in earnings per share for 2012 before a potential rebound next year.
Avery's response to the tough conditions has been to sell off parts of its business. Earlier this year, 3M
But one interesting technology Avery's involved in is a health diagnostic sensor. Just as Nike
For Avery to improve, it needs to break out of its old mold and start moving in innovative new ways. If it can do so, though, it has plenty of room to move higher toward perfection.
Keep searching
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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