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 Office Depot (NYSE: ODP ) 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 Office Depot.
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just a single point out of 10, Office Depot falls well short of perfection. The office products retailer has seen hard times, and despite a big run-up in shares from 2009 lows, the future is still extremely unclear for the company.
Office Depot finds itself under assault from all fronts. Both it and OfficeMax (NYSE: OMX ) have suffered at the hands of rival Staples (Nasdaq: SPLS ) , which increasingly dominates the big-box office retail space. At the same time, more general competitors like Amazon.com (Nasdaq: AMZN ) and Wal-Mart (NYSE: WMT ) are muscling in on the company's home turf.
That has had a huge impact on the company's financials. With future obligations ranging from paying dividends on preferred shares to maintaining its operating leases, the company's balance sheet debt understates the challenge that Office Depot faces in managing its cash flow.
Even with a 40% drop in the past year, Office Depot shares have more than tripled from their lows two years ago. Yet unless the company somehow regains traction, the stock could easily trade back down in the months to come. Until you see marked signs of improvement, Office Depot isn't going to be a perfect stock.
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."