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 Waste Management
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 Waste Management.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.0%||Fail|
|1-Year Revenue Growth > 12%||6.9%||Fail|
|Margins||Gross Margin > 35%||36.2%||Pass|
|Net Margin > 15%||7.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||153.8%||Fail|
|Current Ratio > 1.3||0.78||Fail|
|Opportunities||Return on Equity > 15%||15.5%||Pass|
|Valuation||Normalized P/E < 20||16.72||Pass|
|Dividends||Current Yield > 2%||4.1%||Pass|
|5-Year Dividend Growth > 10%||9.1%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Waste Management last year, the company has kept the same four-point score. The trash and recycling leader boasts strong dividends, but it hasn't been able to grow lately, and debt levels remain elevated.
Waste Management is the biggest waste services company in the U.S., with trash collection and recycling programs around the country. Even with Republic Services
But tough economic times actually have an impact even on trash. Waste Management's stock lost ground in 2011, especially as municipal governments had trouble with their budgets. Yet the company has made attempts to grow the business through new initiatives including energy production from trash. In addition, the health-care waste services market has promise, as Stericycle
Looking forward, Waste Management's biggest growth opportunity lies in overseas markets. So far, the company has largely ceded the world to Veolia Environnement
For Waste Management to improve, it needs to have those growth initiatives bear fruit. With dividends already yielding 4%, more attention to reducing debt would also get the company moving in the right direction to get closer to perfection.
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.
Waste Management isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Waste Management to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Waste Management, Stericycle, Republic Services, and Veolia Environnement, as well as writing a covered strangle position in Waste Management. 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.
More from The Motley Fool
Waste Management's 10% Dividend Boost Lights a Fire Under the Stock Price
Shares hit an all-time high Friday.
These 3 Stocks Just Raised Their Dividends
Last week saw a major aerospace company, a monster telecom, and a busy rubbish hauler improve their shareholder payouts.
5 Things Waste Management Inc. Wants You to Know
Key insights from the garbage king's earnings call.