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 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 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 PriceSmart.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||18.2%||Pass|
|1-Year Revenue Growth > 12%||22.3%||Pass|
|Margins||Gross Margin > 35%||16.4%||Fail|
|Net Margin > 15%||3.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||19.9%||Pass|
|Current Ratio > 1.3||1.35||Pass|
|Opportunities||Return on Equity > 15%||18.1%||Pass|
|Valuation||Normalized P/E < 20||32.40||Fail|
|Dividends||Current Yield > 2%||1.0%||Fail|
|5-Year Dividend Growth > 10%||15.0%||Pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
PriceSmart clocks in with fairly strong score of 6. The company has taken a concept that has proven incredibly successful in the U.S. and started applying it to emerging markets.
PriceSmart operates a chain of warehouse club stores in Central America and the Caribbean. The original company, known as Price Club, merged with Costco (Nasdaq: COST ) in 1993. But while Costco kept the U.S. operations, it spun off the international business as PriceSmart.
You can tell from the company's growth rates that operating abroad is different from the experience that BJ's Wholesale (NYSE: BJ ) or Wal-Mart's (NYSE: WMT ) Sam's Club has with its customers. PriceSmart has grown much faster, and although net margins of 3.8% may not seem like much, they're more than double Costco's and triple BJ's.
The source of PriceSmart's success may well come from U.S. expatriates. With more retirees going abroad to spend their golden years, PriceSmart's stores offer a familiar reminder of home. Moreover, even though memberships are expensive compared to standards of living in the countries in which its stores are located, PriceSmart has plenty of growth potential as a rising middle class becomes more able to afford its wares.
With a steadily rising dividend, PriceSmart offers something for everyone. Shares are pricey at their current valuation, but if a pullback puts the stock on sale, PriceSmart may well get a little closer to perfection 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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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.