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 Texas Industries (NYSE: TXI ) 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 Texas Industries.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(8.3%)||Fail|
|1-Year Revenue Growth > 12%||3.6%||Fail|
|Margins||Gross Margin > 35%||3.6%||Fail|
|Net Margin > 15%||(7.7%)||Fail|
|Balance Sheet||Debt to Equity < 50%||94.9%||Fail|
|Current Ratio > 1.3||3.05||Pass|
|Opportunities||Return on Equity > 15%||(6.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With only a single point, Texas Industries hasn't built up much success. The construction materials maker has suffered through a long, hard spell for the industry.
Texas Industries makes cement, aggregates like sand and gravel, and ready-mix concrete for commercial and consumer use. Much of these materials get used in home construction, which obviously hasn't been a growth area for some time. Mexican giant Cemex (NYSE: CX ) and U.S. competitors like Eagle Materials (NYSE: EXP ) , Vulcan Materials (NYSE: VMC ) , and Martin Marietta (NYSE: MLM ) have also seen significant sales declines over the past five years, along with companies that provide different types of building materials such as USG (NYSE: USG ) .
Despite the long downturn, the stock has attracted significant insider interest. Southeastern Asset Management, which runs the Longleaf Partners funds, holds a 27% stake in the company and has been adding to its positions recently. Moreover, earlier this week, Texas Industries shares rallied on news that the company had ended a standstill agreement with a company called NNS Holding, which owns about 20% of its shares. The move opens the door for NNS to build a bigger position and potentially make changes that investors hope will enhance shareholder value.
As a cyclical stock, it's only a matter of time before Texas Industries starts pulling itself up. The question is whether it will do so as a public company or after another company acquires it. It's too early to tell, but either way, the stock may be an interesting way to play an economic recovery.
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 Texas Industries 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."