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 Sotheby's
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 Sotheby's.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 7.8% | Fail |
| 1-Year Revenue Growth > 12% | 36.2% | Pass | |
| Margins | Gross Margin > 35% | 59.4% | Pass |
| Net Margin > 15% | 23.5% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 51.7% | Fail |
| Current Ratio > 1.3 | 1.60 | Pass | |
| Opportunities | Return on Equity > 15% | 26.5% | Pass |
| Valuation | Normalized P/E < 20 | 13.30 | Pass |
| Dividends | Current Yield > 2% | 0.6% | Fail |
| 5-Year Dividend Growth > 10% | (12.9%) | Fail | |
| Total Score | 6 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, bidding on Sotheby's perfection could go higher. The auctioneer's prospects are tied to the overall economy, but with its upper-class clients following different financial rules from mainstream consumers, business has actually been very good lately.
Sotheby's is well known as one of the two preeminent auction houses in the world. Along with Christie's, Sotheby's is the place to go for high-priced art and other ultra-luxury items.
Anything depending on big-ticket sales may seem like exactly the wrong place to invest as threats of a double-dip recession resurface. But rich consumers have held up better during the downturn than their less wealthy counterparts. Just as we've seen luxury-oriented retailers Coach
Earlier this month, Sotheby's recorded its best results in company history. Net income jumped 48% due to greater business at auctions and private sales. In particular, the company has made inroads within China, both in terms of attracting bidders and in acquiring auction listings from sellers as well. The jump reversed a troubling first quarter that featured lackluster art sales and weak profits due to higher expenses.
Sotheby's follows the whims of the upper-crust's desire to buy and sell the most expensive objects on the planet. That leaves it short of perfection, but if the rich continue to stay above the recessionary fray, then Sotheby's should benefit from their good fortune.
Keep searching
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.
