Has Beazer Homes 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, then decide if Beazer Homes (NYSE: BZH  ) 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 Beazer Homes.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(19.8%)

Fail

 

1-Year Revenue Growth > 12%

35.5%

Pass

Margins

Gross Margin > 35%

11.7%

Fail

 

Net Margin > 15%

(14.5%)

Fail

Balance Sheet

Debt to Equity < 50%

571.3%

Fail

 

Current Ratio > 1.3

11.10

Pass

Opportunities

Return on Equity > 15%

(58.9%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

2 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Beazer Homes last year, the company has picked up an extra point, with revenue soaring. The stock has exploded higher, rising almost 50% over the past year as investors get more enthusiastic about a potential recovery in the housing market.

Homebuilder stocks got smacked hard during the housing bust, with Beazer at one point having lost more than 99% of its stock value during the worst of the crisis compared to its 2005 and 2006 highs. Although big builders Toll Brothers (NYSE: TOL  ) and PulteGroup (NYSE: PHM  ) weathered the storm somewhat better, Beazer and its smaller-builder peers took the brunt of the damage.

Recently, though, hopes of a turnaround in housing have inspired investors, sending stocks soaring. Better data on housing starts and average home prices have especially helped Hovnanian (NYSE: HOV  ) and KB Home (NYSE: KBH  ) , although Beazer also saw a big pop in its stock earlier this year.

In its most recent quarter, though, Beazer didn't quite give investors what they were hoping to see. Although new home orders rose 10%, the company posted a huge quarterly loss of $2.82 per share, more than double the loss that analysts had expected. With expectations of further losses in the 2013 and 2014 fiscal years, Beazer isn't anywhere close to having things turned around.

For Beazer to improve, it simply has to get a handle on its huge losses and start finding ways to get back toward profitability. A turnaround in housing will help, but the stock already reflects a degree of that strength. With strong competition, Beazer's not a sure bet to get closer to perfection even if home prices push higher more substantially.

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


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