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 Tyco International
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 Tyco International.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (0.1%)* | Fail |
| 1-Year Revenue Growth > 12% | 1.9% | Fail | |
| Margins | Gross Margin > 35% | 37.9% | Pass |
| Net Margin > 15% | 9.3% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 29.5% | Pass |
| Current Ratio > 1.3 | 1.48 | Pass | |
| Opportunities | Return on Equity > 15% | 10.2% | Fail |
| Valuation | Normalized P/E < 20 | 19.93 | Pass |
| Dividends | Current Yield > 2% | 2.3% | Pass |
| 5-Year Dividend Growth > 10% | 13.6%* | Pass | |
| Total Score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes. *Since mid-2007 spinoff of two divisions.
With six points, Tyco International has done better than many companies in striving for perfection. The conglomerate has made a number of strategic moves in the past several years but still has work to do to improve its financial condition.
Four years ago, Tyco spun off the health-care side of its business into Covidien
You'd think that with all that action, Tyco would stand pat. But lately, conglomerate breakups have come back into vogue. ITT
That has pushed Tyco to do another split. Now, the surviving business will retain the company's fire and security systems to business customers. Meanwhile, Tyco will spin off its ADT home security segment into a second entity and its industrial pipe and valve business into a third.
Basically, all this building-up and tearing-down masks the fact that Tyco's business has largely stagnated in recent years. The company is reasonably profitable, but its growth heyday appears to be over. No matter how you slice it, Tyco isn't going to become a perfect stock in anything like its current form.
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.
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