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 Kroger
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 Kroger.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 6.5% | Fail |
| 1-Year Revenue Growth > 12% | 7.9% | Fail | |
| Margins | Gross Margin > 35% | 22.4% | Fail |
| Net Margin > 15% | 1.4% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 141.8% | Fail |
| Current Ratio > 1.3 | 0.87 | Fail | |
| Opportunities | Return on Equity > 15% | 22.9% | Pass |
| Valuation | Normalized P/E < 20 | 13.38 | Pass |
| Dividends | Current Yield > 2% | 1.7% | Fail |
| 5-Year Dividend Growth > 10% | 44.5% | Pass | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just three points, Kroger leaves its shareholders hungry. In a low-margin business, Kroger continues to face strong competition and rising food prices, but it has posted some good success stories as well.
The grocery business has been tough lately. Traditional grocers like Safeway
But Kroger has answered the call. The company has proactively cut costs on everything from energy usage to product distribution. In addition, its decision to put gas stations alongside its stores has brought more tangible benefits to its loyalty program and added convenience for its shoppers. Those successes have prompted competitors like SUPERVALU
Kroger will never have the premium attraction of Whole Foods
Keep searching
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 Kroger 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.
