Has Gerdau 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 Gerdau (NYSE: GGB  ) 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 Gerdau.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

5.6%

Fail

 

1-year revenue growth > 12%

11.5%

Fail

Margins

Gross margin > 35%

13%

Fail

 

Net margin > 15%

4.6%

Fail

Balance sheet

Debt to equity < 50%

51.8%

Fail

 

Current ratio > 1.3

2.17

Pass

Opportunities

Return on equity > 15%

6.6%

Fail

Valuation

Normalized P/E < 20

28.96

Fail

Dividends

Current yield > 2%

1.6%

Fail

 

5-year dividend growth > 10%

(10.5%)

Fail

       
 

Total score

 

1 out of 10

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

Since we looked at Gerdau last year, the company has plunged by three points, as revenue growth and profitability have both sunk. Yet that hasn't held the stock back, as it has risen more than 20% over the past year.

Gerdau is far from a household name in the U.S. or elsewhere in the developed world. But as a Brazilian steel producer, the company has home-field advantage in tapping the emerging market's rising economic fortunes.

Moreover, Brazil in particular has some huge growth potential from the construction and infrastructure areas. With the South American giant hosting the 2014 World Cup and the 2016 Summer Olympic Games, Brazil is seeing an added boost to building activity, and that has helped companies around the world. For instance, Manitowoc (NYSE: MTW  ) has made a big entry into the country with its crane business, while fellow construction giants Caterpillar (NYSE: CAT  ) and Terex have set their sights on Brazil for quite a while and found success there.

Around the world, however, steel producers have struggled in the current sluggish economic environment. With activity in China having slowed down substantially, global steel producers ArcelorMittal (NYSE: MT  ) and U.S. Steel (NYSE: X  ) have both seen their stocks get hammered due to overproduction and supply gluts. Until that situation changes, Gerdau and its peers will have a tough time pushing sales higher and broadening its customer base.

For Gerdau to improve, it needs the global economy to press higher. When that happens, the Brazilian steel company should be in a good position to take advantage and move back 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.

If construction is the key for steel companies to get out of their funk, then Caterpillar is the logical place to look for signs of a future rebound. Find out whether Caterpillar will rise or fall in 2013 by reading our in-depth research report on the stock. Just click here to access it now.

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


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  • Report this Comment On December 21, 2012, at 5:21 PM, vurlach wrote:

    You need a new headline. This one is used by you over and over again. One would think there would be only one "perfect stock". This one happens to have gone down today while other less than perfect stocks have gone up. What gives?

    I hate it when I buy a stock and then the Fools write about it. It generally tanks after the article.

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