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 look for them. Let's discuss the ideal qualities of a perfect stock, and then decide if PriceSmart (Nasdaq: PSMT ) 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 the 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 profit, 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 PriceSmart.
What We Want to See
Pass or Fail?
|Growth||Five-year annual revenue growth > 15%||18.6%||Pass|
|One-year revenue growth > 12%||21.5%||Pass|
|Margins||Gross margin > 35%||15.8%||Fail|
|Net margin > 15%||3.2%||Fail|
|Balance Sheet||Debt to equity < 50%||20.9%||Pass|
|Current ratio > 1.3||1.4||Pass|
|Opportunities||Return on equity > 15%||16.3%||Pass|
|Valuation||Normalized P/E < 20||36.4||Fail|
|Dividends||Current yield > 2%||0.8%||Fail|
|Five-year dividend growth > 10%||30.3%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at PriceSmart last year, the company has held onto its six-point score. Even though the stock has jumped about 15% in the past year, it has taken investors on a big rollercoaster ride along the way.
If you've ever been in a warehouse club store, you'd recognize PriceSmart's business model. Costco (Nasdaq: COST ) actually evolved from the old Price Club, from which PriceSmart was spawned. Unlike Costco's stores, PriceSmart operates mostly in Central America and the Caribbean.
But PriceSmart hasn't had clear sailing lately. On one hand, the company has its sights on growth opportunities in South America, but economic growth in the emerging economies of that continent has started to slow. On the other hand, PriceSmart also faces substantial competition from international divisions of Wal-Mart (NYSE: WMT ) , which has also seen Central and South America as big growth prospects.
You can see the headwinds that PriceSmart is facing in Latin America in the results of other companies there. For instance, fast-food franchise giant Arcos Dorados (NYSE: ARCO ) has seen its stock get hammered due to weakness in its Caribbean division, even as same-store sales in many South American countries were up strongly. Meanwhile, MercadoLibre (Nasdaq: MELI ) has successfully fought off eBay in its illustrious history, but recently growth hasn't remained fast enough to sustain the stock's high valuations.
For PriceSmart to improve, it needs to get earnings growing fast enough to get its premium valuation down to earth. That, plus a further improvement to its dividend, could easily move PriceSmart toward perfection in the years to come.
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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