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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 Vulcan Materials (NYSE: VMC ) 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 Vulcan Materials.
|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%||(1.2%)||Fail|
|Margins||Gross Margin > 35%||11.5%||Fail|
|Net Margin > 15%||(4.4%)||Fail|
|Balance Sheet||Debt to Equity < 50%||70.0%||Fail|
|Current Ratio > 1.3||1.24||Fail|
|Opportunities||Return on Equity > 15%||(3.1%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||2.5%||Pass|
|5-Year Dividend Growth > 10%||(4.2%)||Fail|
|Total Score||1 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.
Vulcan Materials can only manage to dig up a single point. The seller of aggregates has dug itself into a pretty deep hole, and it may be a while before it gets back to the surface.
Vulcan sells crushed rock, gravel, and sand through its network of quarries around the nation. With those materials being key components of construction projects, Vulcan's prospects are largely tied to those of the building sector. And unfortunately, that sector hasn't rebounded from the recession very quickly, especially in beaten-down areas like California and Florida, which happen to be two of Vulcan's biggest markets. Along with companies like USG (NYSE: USG ) and Texas Industries (NYSE: TXI ) that are also exposed to construction, Vulcan's shares have dropped over the past five years.
Vulcan also faces ongoing competitive pressure. Despite having some pricing power to make up for demand shortfalls, Vulcan has seen a steady drop in sales over the past several years. But unlike Vulcan, fellow aggregates producer Martin Marietta Materials (NYSE: MLM ) has seen revenue growth return over the past year and managed to post a modest profit. In addition, Vulcan also makes cement and asphalt, but because it is much smaller than leaders like Cemex (NYSE: CX ) and Lafarge, it doesn't have the pricing power that it has in aggregates.
Vulcan's best prospects come from the well-recognized need for infrastructure improvements. But with the federal government under pressure to cut costs, long-awaited infrastructure spending may not come as quickly as Vulcan would like. Until that happens -- or until the private-sector construction industry wakes up from its long sleep -- Vulcan isn't going to become 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.
Click here to add Vulcan Materials to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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."