Has Pulte 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 PulteGroup (NYSE: PHM  ) 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 Pulte.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

(15.9%)

Fail

 

1-year revenue growth > 12%

11.2%

Fail

Margins

Gross margin > 35%

15.1%

Fail

 

Net margin > 15%

3.6%

Fail

Balance sheet

Debt to equity < 50%

149.7%

Fail

 

Current ratio > 1.3

3.42

Pass

Opportunities

Return on equity > 15%

8%

Fail

Valuation

Normalized P/E < 20

60.81

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

1 out of 10

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

Since we looked at Pulte last year, the company hasn't been able to regain the point it lost from 2011 to 2012. But the homebuilder has made huge progress by turning a profit, and investors have enjoyed stellar returns of around 150% over the past year as a result.

2012 was an incredible year for homebuilders in general. As home prices hit bottom and actually rose year over year, the long-dormant shares of many homebuilders' stocks soared in anticipation of a stronger recovery. Although Hovnanian (NYSE: HOV  ) beat out Pulte by more than quadrupling in price during 2012, Pulte found itself well ahead of many other big players in the space, including KB Home (NYSE: KBH  ) and Standard Pacific (NYSE: SPF  ) . Hovnanian and KB enjoyed some massive revenue gains, while Pulte has seen new orders rise big to support its reversal of year-ago losses.

The trend that Pulte has tapped into is the desire for newer and larger homes. Although the long-term prospects for existing home prices may not be all that much better than inflation, a big drop in construction over the past several years has created an opportunity for Pulte and its builder peers. The fact that Home Depot (NYSE: HD  ) is seeing accelerating contractor spending in its stores bodes equally well for the health of the housing market going forward.

Still, it's important to understand that Pulte has a long way to go. With a big debt burden and fairly thin margins, Pulte is still vulnerable to an economic reversal. Moreover, with extremely high lumber prices, the company faces cost pressures that could make profits hard to sustain.

For Pulte to keep improving, it needs the housing recovery to continue and for low interest rates to spur buying activity. Without those tailwinds, the stock may well have gotten ahead of itself.

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. 

To find big gainers like Pulte, you have to know where to look. Motley Fool co-founder David Gardner's picks have frequently trounced the market because he's always on the lookout for revolutionary stocks, and when he finds them, he recommends them before Wall Street catches on to their disruptive potential. If you're interested in how David discovers his winners, click here to get instant access to a personal tour behind David's Supernova service.

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


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