Has Ferro Become the Perfect Stock?

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, and then decide if Ferro (NYSE: FOE  ) 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 Ferro.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

(1.4%)

Fail

 

One-year revenue growth > 12%

(13.2%)

Fail

Margins

Gross margin > 35%

18.3%

Fail

 

Net margin > 15%

(0.6%)

Fail

Balance sheet

Debt to equity < 50%

58.5%

Fail

 

Current ratio > 1.3

1.82

Pass

Opportunities

Return on equity > 15%

(1.9%)

Fail

Valuation

Normalized P/E < 20

18.10

Pass

Dividends

Current yield > 2%

0%

Fail

 

Five-year dividend growth > 10%

0%

Fail

       
 

Total Score

 

2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Ferro last year, the company has lost a point as its revenue plunged. The stock has done even worse, falling about 40% over the past year.

Ferro is a chemical company that makes a variety of coatings, ceramics, chemicals, and other materials to help enhance performance in a number of industries. Many companies in that space have done quite well, with Rockwood Holdings (NYSE: ROC  ) and paint specialist Sherwin-Williams (NYSE: SHW  ) having been able to increase prices and boost revenue.

But Ferro hasn't participated in that success. One reason may be that it has substantial exposure to the solar industry because of its production of conductive pastes used in solar cells. With Chinese solar manufacturers ReneSola (NYSE: SOL  ) and Trina Solar (NYSE: TSL  ) among the many industry players facing a glut of solar cells, weak pricing, and poor margins, Ferro can't count on solar helping out its results anytime soon.

A rebounding housing market may give Ferro some relief in the near future. In late 2011, shares surged after positive housing reports indicated a recovery for the beleaguered sector. Although that recovery proved premature, the stronger recent rebound could have the same effect.

Ferro has a lot of work to do in order to improve. With restructuring costs behind it, it should hopefully be able to get back to profitability. But unless it can go a lot further and get back into growth mode on the sales front, Ferro may never reach perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection 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.

Ferro 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 popular 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 Ferro to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Sherwin-Williams. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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