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 CLARCOR (NYSE: CLC ) 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 CLARCOR.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.5%||Fail|
|1-Year Revenue Growth > 12%||5.8%||Fail|
|Margins||Gross Margin > 35%||34.2%||Fail|
|Net Margin > 15%||11.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||2.1%||Pass|
|Current Ratio > 1.3||4.10||Pass|
|Opportunities||Return on Equity > 15%||15.0%||Pass|
|Valuation||Normalized P/E < 20||21.89||Fail|
|Dividends||Current Yield > 2%||1.0%||Fail|
|5-Year Dividend Growth > 10%||10.3%||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at CLARCOR last year, the company has picked up a point. The shares have also posted a modest gain of between 10% and 15% over the past year.
CLARCOR makes a variety of filters and filtering systems for engines, industrial machinery, air cleaners, and energy-related products and processes. That gives CLARCOR a somewhat different focus than peer Pall (NYSE: PLL ) , which concentrates on health-care-related applications like blood filtering, as well as Calgon Carbon's (NYSE: CCC ) emphasis on water-treatment systems. Donaldson (NYSE: DCI ) is a more direct competitor in air and liquid filtration for engines and emissions, and it has succeeded in producing some amazing results for shareholders.
For its part, though, CLARCOR hasn't managed to cash in on its business. In its most recent quarter, the company missed expectations and cut its guidance for the rest of the year, as slowing growth in China and negative currency effects hurt the company's bottom line.
One area where CLARCOR is looking for growth is in biofuels. Back in 2008, the company entered into a joint venture with Green Plains Renewable Energy (Nasdaq: GPRE ) to commercialize algae production. Last month, the venture said that construction of its phase 3 commercial farms is nearly completion, and if it's successful, it could have a positive impact on CLARCOR in the long run.
For CLARCOR to improve, though, it needs to look for ways to boost margins slightly and its revenue more substantially. Advances in engine technology and a global recovery could both do the trick, but CLARCOR will need to beat out its rivals if it wants to get much 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 out the best investments from the rest.
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