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 McDonald's
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 McDonald's.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||4.3%||Fail|
|1-year revenue growth > 12%||5.6%||Fail|
|Margins||Gross margin > 35%||39.9%||Pass|
|Net margin > 15%||20.6%||Pass|
|Balance sheet||Debt to equity < 50%||83.4%||Fail|
|Current ratio > 1.3||0.90||Fail|
|Opportunities||Return on equity > 15%||35.5%||Pass|
|Valuation||Normalized P/E < 20||19.85||Pass|
|Dividends||Current yield > 2%||3%||Pass|
|5-year dividend growth > 10%||28.2%||Pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, McDonald's serves up a pretty tasty stock. The company has dodged most of the economic recession with its combination of growth and appeal for cash-strapped consumers.
McDonald's shareholders have had almost an unbroken line of strong results in recent years. The stock beat out the bear market of 2008, rising almost 9% in a year in which the S&P 500 fell 37%. Yet that hasn't stopped the stock from posting impressive share price growth during the recovery.
The secret comes from McDonald's aggressive strategic moves and tenacious customer demand. On one hand, the company pushed into Starbucks'
What makes McDonald's success all the more impressive is that it's doing well in a tough period for many restaurant chains. The company increased menu prices earlier this year in response to higher costs, just as Darden
In short, if the company can raise dividends and stay reasonably priced in such a horrible environment, it could get even better when things get back to normal for the economy. McDonald's falls short of perfection, but that doesn't mean you should ignore it as a prospect for your portfolio.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Red Robin, Yum!, and Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks and McDonald's as well as writing a covered strangle position on Red Robin. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.