Is Owens Corning 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, then decide if Owens Corning (NYSE: OC  ) 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 Owens Corning.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

1.3%

Fail

 

1-Year Revenue Growth > 12%

6.7%

Fail

Margins

Gross Margin > 35%

19.0%

Fail

 

Net Margin > 15%

3.1%

Fail

Balance Sheet

Debt to Equity < 50%

61.3%

Fail

 

Current Ratio > 1.3

1.98

Pass

Opportunities

Return on Equity > 15%

4.6%

Fail

Valuation

Normalized P/E < 20

18.72

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

2 out of 10

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

Owens Corning scores only two points, showing the weakness it suffered during the recession. But shares have rebounded more than 30% over the past year as some believe the housing and construction market may have finally hit bottom.

Owens Corning is best known for its fiberglass insulation products, but it actually makes a wide array of building materials. You'll find roofing shingles among its product lines, and it also has an extensive glass fiber fabrication business that serves as a supplier to a host of industries, ranging from telecom and transportation to defense and aircraft. The company was formed as a partnership between Corning (NYSE: GLW  ) and Owens-Illinois way back in 1935 and was spun off as a separate entity just three years later.

Throughout the construction bust, Owens Corning and its peers found themselves under pressure. Cement maker Cemex (NYSE: CX  ) fell sharply during housing's numerous false starts but has seen shares triple in the past year as a recovery has taken shape. Similarly, Masco (NYSE: MAS  ) has seen demand increase as more homeowners remodel their homes and need cabinets and plumbing supplies.

Despite calls for a rebound, Owens Corning hasn't seen a boost in its business yet. Earlier this week, the company slashed its earnings guidance, noting that sales of both roofing products and composite materials were much weaker than expected. Owens Corning's shares dropped 8%, and drywall maker USG (NYSE: USG  ) also sank in sympathy.

For Owens Corning to improve, it needs a much faster pace of recovery to boost demand for both segments of its business. Margins may never be strong, but faster growth and better returns on equity could go a long way toward bring Owens Corning closer to 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.

Owens Corning will benefit from a stronger housing market, but with the explosive growth of smartphones worldwide, many investors thought that its one-time parent Corning would produce massive investment returns. That hasn't played out yet, as mobile growth has failed to offset declines in the company's core business. In this brand new premium research report on Corning, our analyst walks through the business, as well as the key opportunities and risks facing it today. Click here to claim your copy, and receive a full year of updates as key events unfold.

Click here to add Owens Corning to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Corning. Motley Fool newsletter services recommend Corning. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2055221, ~/Articles/ArticleHandler.aspx, 10/21/2014 1:45:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement