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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 Avon Products (NYSE: AVP ) 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 Avon Products.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||5.9%||Fail|
|1-Year Revenue Growth > 12%||6.4%||Fail|
|Margins||Gross Margin > 35%||62.9%||Pass|
|Net Margin > 15%||5.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||188.1%||Fail|
|Current Ratio > 1.3||1.42||Pass|
|Opportunities||Return on Equity > 15%||39.9%||Pass|
|Valuation||Normalized P/E < 20||18.71||Pass|
|Dividends||Current Yield > 2%||3.3%||Pass|
|5-Year Dividend Growth > 10%||5.9%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Avon Products comes up square in the middle with a score of 5. The well-known cosmetics company has gotten a lot of attention lately, but its business prospects aren't as attractive.
Avon's socially based direct-selling model seems like a perfect fit for the times, given the rise of social media. But the company faces a huge amount of competition. Mary Kay and Tupperware Brands (NYSE: TUP ) are just two of the many rivals that have at-home selling events. Moreover, big-name cosmetics companies like Estee Lauder (NYSE: EL ) and Revlon (NYSE: REV ) have made a big splash in shopping malls, with retailers like Ulta (Nasdaq: ULTA ) threatening to oversaturate demand for cosmetics.
The company has had restructuring plans in place for years, but more recently, attention has focused on the potential for an acquirer to buy Avon out. Some have named L'Oreal as a possible buyer, but so far, the only result has been higher share prices on the takeover speculation. In particular, despite its strong presence overseas, the company hasn't been able to match its competitors' growth.
Avon once demonstrated how a simple business model could translate into a huge enterprise. But the business needs a major makeover if it's going to restore confidence to investors and become relevant again. Until that happens, the blemishes it's suffered in the recent past will keep it from being 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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