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 Mueller Water (NYSE: MWA ) 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 Mueller Water.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||(3.7%)||Fail|
|1-Year Revenue Growth > 12%||(3.9%)||Fail|
|Margins||Gross Margin > 35%||18.4%||Fail|
|Net Margin > 15%||(2.7%)||Fail|
|Balance Sheet||Debt to Equity < 50%||172.2%||Fail|
|Current Ratio > 1.3||3.27||Pass|
|Opportunities||Return on Equity > 15%||(8.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||2.9%||Pass|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.
With a score of only two points, Mueller Water isn't very refreshing. The company still stands to profit from inevitable municipal spending to upgrade and repair a decaying water infrastructure, but with government budgets stretched to the limit, Mueller may have to wait a while before municipalities actually pony up the cash.
Mueller makes pipe, valves, and other products related to creating water and wastewater systems for utilities and municipal governments. With rising populations causing ever-increasing demand for water, companies like Mueller, Veolia Environnement (NYSE: VE ) , and Heckmann (NYSE: HEK ) are all positioning themselves to take full advantage in their respective market niches. In particular, while Veolia is the largest water services company in the world, and Heckmann focuses on its China bottled water service as well as its pipeline to remove fracking fluids from sensitive oil and gas fields, Mueller stands to benefit when aging water systems get replaced.
Increasingly, though, investors are skeptical that local governments will have the resources to go forward with this work, leaving Mueller in an uncomfortable situation. Moreover, with alternatives such as Insituform Technologies (Nasdaq: INSU ) and its less expensive, less disruptive in-place pipe patching process, cash-strapped cities and towns might well bypass Mueller entirely.
Timing is all-important in investing, and Mueller is a great example of how being early to the game can sometimes cost you. Although it's in an industry that undeniably needs its services, Mueller may nevertheless not reach 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."