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 Wal-Mart
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 Wal-Mart.
|
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% | 3.0% | Fail | |
| Margins | Gross Margin > 35% | 25.2% | Fail |
| Net Margin > 15% | 3.9% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 81.4% | Fail |
| Current Ratio > 1.3 | 0.90 | Fail | |
| Opportunities | Return on Equity > 15% | 23.4% | Pass |
| Valuation | Normalized P/E < 20 | 13.12 | Pass |
| Dividends | Current Yield > 2% | 2.7% | Pass |
| 5-Year Dividend Growth > 10% | 15.6% | Pass | |
| Total Score | 4 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With four points, Wal-Mart isn't ringing up perfection just yet. The discount retail giant has been a leader for decades, but the company has struggled recently.
During the recession, Wal-Mart's stock was a beacon of hope in a gloomy market. In 2008, when the S&P dropped 37%, Wal-Mart actually posted a big 20% gain -- even as similar retailers, like Target
Yet now that the recession is supposedly over, Wal-Mart is facing almost unique difficulty in sustaining growth. Last month, the company announced its eighth straight quarter of falling same-store sales in its U.S. stores. International growth has been stronger, with an 11.5% gain in sales in the latest quarter. But at $28 billion per quarter, the international segment still represents only about a quarter of total revenue. Meanwhile, rival Costco
Part of the problem may be competition from below. Wal-Mart is no longer the cheapest game in town, with ultra-discounters Dollar General
Until Wal-Mart can regain its reputation as the undisputed low-price leader, its retreat from perfection will likely continue. Only by refocusing on its core mission will it restore its former greatness.
Keep searching
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 Wal-Mart 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.
