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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 Boise (NYSE: BZ ) 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 Boise.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.4%*||Fail|
|1-Year Revenue Growth > 12%||11.7%||Fail|
|Margins||Gross Margin > 35%||21.8%||Fail|
|Net Margin > 15%||4.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||83.4%||Fail|
|Current Ratio > 1.3||2.19||Pass|
|Opportunities||Return on Equity > 15%||12.1%||Fail|
|Valuation||Normalized P/E < 20||4.89||Pass|
|Dividends||Current Yield > 2%||7.8%**||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||3 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful as the company paid its first special dividend in 2010. *Revenue growth since December 2008. **Based on $0.40 special dividend earlier in 2011. Total score = number of passes.
With three points, Boise isn't packaging up a pretty gift for shareholders. Recent struggles have pushed the stock down to ridiculously low valuations, raising questions about whether value investors should jump in now.
Boise is a paper packaging and forest-products manufacturer. For a long time, the industry suffered from weak demand and oversupply, but in recent years, fundamentals have improved as inventories fell, demand stabilized, and overcapacity disappeared. That helped Boise stock post an 1,100% return in 2009.
Even with gains like that, valuations in the industry haven't expanded very far. International Paper's (NYSE: IP ) hostile bid to take over industry peer Temple-Inland (NYSE: TIN ) strongly suggests that industry executives see value in paper companies. The prospect of consolidation briefly ignited interest not only in Boise but in other packaging stocks such as Rock-Tenn (NYSE: RKT ) and Packaging Corp. of America (NYSE: PKG ) .
But the shares' bump has proven short-lived. Earlier this week, Boise's stock took another hit after Boise released its second-quarter earnings report. Sales rose more than 15% from last year, but the company missed its earnings-per-share estimate, sending shares falling 18% on Thursday.
Boise has enough debt to raise questions about its long-term prospects. But with the stock trading at modest single-digit multiples, all that risk seems to be baked into the share price. It may not be perfect, but for adventuresome investors, Boise might be worth a speculative 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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.