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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 National Beverage (Nasdaq: FIZZ ) 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 National Beverage.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.7%||Fail|
|1-Year Revenue Growth > 12%||1.2%||Fail|
|Margins||Gross Margin > 35%||35.3%||Pass|
|Net Margin > 15%||6.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||2.82||Pass|
|Opportunities||Return on Equity > 15%||20.9%||Pass|
|Valuation||Normalized P/E < 20||15.86||Pass|
|Dividends||Current Yield > 2%||18.5%*||Pass|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
*Yield comes from special dividend; National Beverage pays no regular dividend.
National Beverage serves up a respectable score of 6. In a very competitive industry, the drinks maker has found success by steering clear of the fray.
National Beverage makes a variety of beverage products, including soft drinks, juices, and energy drinks. Along with its own brands, which include Shasta, Everfresh, and Rip It, the company also makes store-brand products for grocery stores and other retailers.
Some investors may be attracted by the company's high trailing dividend yield, but don't be fooled by this one-time event. The company declared a special dividend late last year in order to make sure shareholders wouldn't have to pay higher taxes if preferential rates on dividends had expired.
As an off-brand retailer, National Beverage won't give you the impressive margins that you'll find from Coca-Cola (NYSE: KO ) , PepsiCo (NYSE: PEP ) , and Dr Pepper Snapple (NYSE: DPS ) . Moreover, growth has been relatively stagnant for National Beverage compared to its competition. But the company has been able to produce good returns on equity, and its shares put in a strong performance over the past decade -- at a pace far greater than Coca-Cola's or PepsiCo's.
National Beverage isn't the perfect stock, but it's a good example of how small companies can find successful niches. Stay on the lookout for similar opportunities in all the industries you follow.
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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