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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 Coca-Cola (NYSE: KO ) 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 Coca-Cola.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.6%||Fail|
|1-Year Revenue Growth > 12%||12.7%||Pass|
|Margins||Gross Margin > 35%||60.3%||Pass|
|Net Margin > 15%||18.3%||Pass|
|Balance Sheet||Debt to Equity < 50%||99.5%||Fail|
|Current Ratio > 1.3||1.11||Fail|
|Opportunities||Return on Equity > 15%||25.8%||Pass|
|Valuation||Normalized P/E < 20||24.75||Fail|
|Dividends||Current Yield > 2%||2.6%||Pass|
|5-Year Dividend Growth > 10%||8.6%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Coca-Cola last year, the company has kept its five-point score. But investors have enjoyed a nice run-up in the stock over the past year, with its recent split coming as welcome news for many shareholders.
It's impossible to argue with the sheer brand power of Coca-Cola. As the top-ranked brand in Interbrand's global brand ratings for 12 years running, the company sells billions of servings every day around the world. Yet while Coca-Cola dominates the U.S., it still has plenty of room to grow in emerging markets like China and India, where per-capita consumption is far lower.
Of course, rival PepsiCo (NYSE: PEP ) has the same goal of expanding strongly into emerging markets. But one thing that will make it easier for Coca-Cola to achieve its goals of doubling revenue by 2020 than for peers like fast-food giant McDonald's (NYSE: MCD ) to grow overseas is its recent decision to streamline its corporate structure. By consolidating multiple international divisions into a single unit, Coca-Cola is grooming new managers for a future CEO role.
In addition, most of the concerns that hit Coca-Cola also apply to smaller competitors Dr Pepper Snapple (NYSE: DPS ) and Monster Beverage (Nasdaq: MNST ) as well. For instance, higher raw-ingredient costs have hit Coke hard, but Coke's superior distribution model allows the company not only to cut costs but also to force its rivals to use Coke as their distributor as well. That's clearly an enviable position for Coke to be in.
For Coca-Cola to improve, it needs to see Europe's slide end and for international growth to return to a stronger course. If macroeconomic trends work out in its favor, then Coca-Cola could get much closer to perfection in the years ahead.
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.
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