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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 McCormick (NYSE: MKC ) 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 McCormick.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.4%||Fail|
|1-Year Revenue Growth > 12%||10.8%||Fail|
|Margins||Gross Margin > 35%||41.2%||Pass|
|Net Margin > 15%||10.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||77.4%||Fail|
|Current Ratio > 1.3||1.23||Fail|
|Opportunities||Return on Equity > 15%||24.3%||Pass|
|Valuation||Normalized P/E < 20||20.91||Fail|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||9.2%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at McCormick last year, the spice company has lost a point. But somewhat faster revenue growth is an encouraging sign for the company as it strives to boost its presence in markets around the world.
McCormick has carved out an impressive niche for itself as a spice specialist. Not only does it have a commanding presence in the consumer market, but it also includes PepsiCo (NYSE: PEP ) and Yum! Brands (NYSE: YUM ) among its commercial clientele. As Pepsi and Yum! have expanded their footprint with global growth, they've reaped the benefits -- and McCormick is going along for the ride with them.
As it turns out, though, the spice industry is surprisingly competitive. B&G Foods (NYSE: BGS ) recently bought the Culver Specialty Brands division of Unilever (NYSE: UL ) , which includes Mrs. Dash spices, to become a potential challenger to McCormick's leadership of the industry. But McCormick has also been in the acquisition game, with its own buyout of Polish spice company Kamis last year. That purchase gave McCormick more exposure to Eastern Europe and Russia. With a joint venture with Kohinoor Foods in India, McCormick is expanding its geographical reach to capture growth opportunities around the globe.
In its latest quarter, McCormick took some more steps to improve its long-term prospects. With margins remaining tight due to inflation in food prices, the company decided to increase spending on advertising to promote brand awareness. That'll hit profits in the near term but could pay off in the long haul.
Even with its solid dividend, McCormick is pretty richly priced right now. Despite its growth potential, I'd suggest that prospective investors wait for a pullback before considering spicing up their portfolios with McCormick.
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 the best investments from the rest.
McCormick added some spice to shareholders' returns last year, but we've got some more stocks that we think will perform well for a lot longer than that. Take a look at the Fool's latest special report and you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.
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