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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 Stanley Black & Decker (NYSE: SWK ) 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 Stanley Black & Decker.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||21.2%||Pass|
|1-Year Revenue Growth > 12%||12.4%||Pass|
|Margins||Gross Margin > 35%||36.8%||Pass|
|Net Margin > 15%||5.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||57.7%||Fail|
|Current Ratio > 1.3||1.14||Fail|
|Opportunities||Return on Equity > 15%||8.5%||Fail|
|Valuation||Normalized P/E < 20||18.04||Pass|
|Dividends||Current Yield > 2%||2.7%||Pass|
|5-Year Dividend Growth > 10%||6.4%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Stanley Black & Decker last year, the company's score has dropped by two points. Yet a 30% gain for the stock in the past year shows the overall strength of solid stocks with healthy dividend yields.
Two years ago, the merger of Stanley Works and Black & Decker seemed like a match made in heaven. Yet the companies never foresaw that a housing market that had already been down in the dumps for several years might still struggle long after their merger was complete.
But recent signs of life from the housing market could spell the end of the dark times for the tool maker. In particular, strong results from Home Depot (NYSE: HD ) have pushed its stock to multiyear highs, and even though home improvement rival Lowe's (NYSE: LOW ) hasn't seen quite the same level of bullishness, it too has posted decent gains. Construction-oriented Lumber Liquidators (NYSE: LL ) has even enjoyed a strong rebound as its value-oriented business model has gained traction with contractors.
Still, Stanley Black & Decker can't count on unfettered profits from a boost in demand. Competitor Snap-on (NYSE: SNA ) also has a strong brand that challenges Stanley's Mac Tools division in high-margin premium tools.
For Stanley Black & Decker to improve, it needs a recovery in Europe as well as continued gains in the U.S. housing market to support its sales. Without those tailwinds, it could take a while for Stanley Black & Decker to get any 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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