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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Gerdau (NYSE: GGB ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.1%||fail|
|1-Year Revenue Growth > 12%||1.2%||fail|
|Margins||Gross Margin > 35%||20.2%||fail|
|Net Margin > 15%||8.4%||fail|
|Balance Sheet||Debt to Equity < 50%||75.7%||fail|
|Current Ratio > 1.3||2.19||pass|
|Opportunities||Return on Equity > 15%||13.6%||fail|
|Valuation||Normalized P/E < 20||15.78||pass|
|Dividends||Current Yield > 2%||2.2%||pass|
|5-Year Dividend Growth > 10%||21.5%||pass|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 4, Gerdau is far from perfect. But from its vantage in one of the most exciting emerging markets in the world, the Brazilian steelmaker warrants interest simply by being in the right place at the right time.
Looking at its financials, Gerdau doesn't look like an exciting candidate. Growth has been sluggish, margins are tight, and debt levels are somewhat high. But those characteristics aren't unusual in the steel industry, and in fact, Gerdau compares pretty favorably with some of its rivals. For instance, U.S. Steel (NYSE: X ) has been a net money-loser over the past 12 months. ArcelorMittal (NYSE: MT ) and Nucor (NYSE: NUE ) both sport lower margins and returns on equity, while their shares will cost you a higher multiple to normalized earnings than Gerdau's.
Brazil is what makes Gerdau particularly interesting. Most are aware that the Olympics is coming to Rio de Janeiro in 2016, but what many U.S. investors may forget is that Brazil is also hosting soccer's 2014 World Cup. Those two major global events will require huge infrastructure improvements, and that means steel, which Gerdau is in the best position to provide.
Of course, infrastructure plays are a two-edged sword. If the global recovery stalls, then a slowdown will have the greatest impact on stocks like Gerdau. But if you're more optimistic about the world economy in general and Brazil in particular, Gerdau is worth a deeper look.
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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