Has T. Rowe Price 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 T. Rowe Price (NASDAQ: TROW  ) 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 T. Rowe Price.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

6.5%

Fail

 

1-year revenue growth > 12%

6.8%

Fail

Margins

Gross margin > 35%

62.1%

Pass

 

Net margin > 15%

28.9%

Pass

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

4.30

Pass

Opportunities

Return on equity > 15%

23.6%

Pass

Valuation

Normalized P/E < 20

19.74

Pass

Dividends

Current yield > 2%

2.1%

Pass

 

5-year dividend growth > 10%

14.4%

Pass

       
 

Total score

 

8 out of 10

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

Since we looked at T. Rowe Price last year, the company gave back one of the two points it gained from 2010 to 2011, as revenue growth slowed. The stock performed reasonably well, though, gaining more than 10% over the past year.

T. Rowe Price is a major provider of no-load mutual funds. For decades, that has been a lucrative business that allowed the company to take its management fees off the top through good times and bad, leading to a fairly stable income stream for investors.

Recently, though, the rise of exchange-traded funds has threatened T. Rowe Price and other mutual fund providers. T. Rowe has had paperwork in place to offer actively managed ETFs as an answer to the threat, but after long delays, the ETFs still haven't become available. Given the success of Pimco Total Return ETF (NYSEMKT: BOND  ) and other active ETFs, however, it's likely only a matter of time before T. Rowe gets into the game -- at least once the logjam of active-ETF applications at the SEC finally breaks in earnest.

Moreover, T. Rowe Price's forward-looking approach with its investments hasn't turned out as well as investors might have hoped. For instance, it found ways to get into Facebook (NASDAQ: FB  ) , Groupon (NASDAQ: GRPN  ) , and Zynga (NASDAQ: ZNGA  ) before they went public. Those looked like promising bets at the time, although clearly, all three of the social-media-related companies have performed far worse than anyone expected.

For T. Rowe Price to improve, it needs to draw investors back to its funds. Whether that involves a new ETF line or better marketing for its existing offerings, T. Rowe Price will have to work hard if it wants to notch those final two points toward 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.

T. Rowe Price's investment in Facebook didn't go exactly how it had hoped after the social media giant's botched IPO. But there are things every investor needs to know about this company. Find out whether Facebook is a buy in our premium report, which will let you read up on whether there is anything to "like" about it today. Access your report by clicking here.

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


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