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 Clean Harbors (NYSE: CLH ) 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 Clean Harbors.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||20.1%||Pass|
|1-Year Revenue Growth > 12%||17.1%||Pass|
|Margins||Gross Margin > 35%||30.8%||Fail|
|Net Margin > 15%||6.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||56.4%||Fail|
|Current Ratio > 1.3||2.58||Pass|
|Opportunities||Return on Equity > 15%||15.4%||Pass|
|Valuation||Normalized P/E < 20||25.06||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Clean Harbors last year, the company has picked up a point. Better returns on equity are behind the improvement, but shareholders have had to be content with a roughly break-even performance for the stock.
They say one person's trash is another's treasure, and nowhere is that truer than in the waste services industry. In the U.S., giants Waste Management (NYSE: WM ) and Republic Services (NYSE: RSG ) have made fortunes taking what people throw away and turning it into something valuable. Veolia Environnement (NYSE: VE ) has taken similar steps in many parts of the world.
But Clean Harbors has staked out a small but incredibly important niche: spill cleanup. The company first gained prominence in the aftermath of the Gulf oil spill two years ago, but since then, it has also been called into action for other spills, including the ExxonMobil (NYSE: XOM ) spill on the Yellowstone River in Montana.
One thing Clean Harbors has going for it is investing interest from insiders. Directors and executives own more than 10% of the company's outstanding shares, putting its interests in line with rank-and-file shareholders.
Given the dangerous world of energy exploration and production, it's unfortunate but true that Clean Harbors likely won't have any shortage of business opportunities in the years to come. In order to improve, the company simply has to win more of those opportunities. If it can do so, then Clean Harbors could get a lot closer to perfection in the near future.
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.
Clean Harbors isn't perfect, but we've got some other ideas for you to take a look at. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Clean Harbors to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.