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 AmBev (NYSE: ABV ) 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 AmBev.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9%||Fail|
|1-Year Revenue Growth > 12%||7.5%||Fail|
|Margins||Gross Margin > 35%||67.6%||Pass|
|Net Margin > 15%||31.9%||Pass|
|Balance Sheet||Debt to Equity < 50%||15.9%||Pass|
|Current Ratio > 1.3||1.02||Fail|
|Opportunities||Return on Equity > 15%||34.6%||Pass|
|Valuation||Normalized P/E < 20||36.70||Fail|
|Dividends||Current Yield > 2%||3.2%||Pass|
|5-Year Dividend Growth > 10%||43.4%*||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *Includes special dividend.
Since we looked at AmBev last year, the company has kept the same six-point score. The stock has jumped strongly, but earnings haven't kept up, pushing valuations to fairly expensive levels.
When most investors think about putting money into emerging-market stocks, they tend to concentrate on particular sectors. For resource-rich Brazil, oil giant Petrobras (NYSE: PBR ) and mining leader Vale (NYSE: VALE ) dominate the investing landscape, as the potential that the Latin American nation has to provide valuable resources to the rest of the world has driven much of the country's success in the past decade.
But the next step in the evolution of emerging-market economies is for their own populace to rise to middle-class consumer status and start a thriving internal economy. That's where AmBev comes in, as it's squarely set to benefit from increased standards of living in Latin America. As a majority-owned subsidiary of Anheuser-Busch InBev (NYSE: BUD ) , AmBev has access to the lucrative Budweiser brand as well as a wide variety of its own beers and soft drinks.
AmBev doesn't have its markets all to itself, though. Mexico-based FEMEX (NYSE: FMX ) has the bulk of its operations in Mexico and Central America, but it has operations in Brazil. Given time, it could pose a threat to AmBev in some of its strongest markets.
For AmBev to keep improving, it needs to find ways to tap into the lucrative Brazilian consumer market as well as expand its reach beyond Brazil's borders. With Latin America's growth still fairly strong, AmBev could potentially get a lot closer to perfect-stock status 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.
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