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 H&R Block
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 H&R Block.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(0.5%)||Fail|
|1-Year Revenue Growth > 12%||8.2%||Fail|
|Margins||Gross Margin > 35%||36.7%||Pass|
|Net Margin > 15%||9%||Fail|
|Balance Sheet||Debt to Equity < 50%||128.1%||Fail|
|Current Ratio > 1.3||0.95||Fail|
|Opportunities||Return on Equity > 15%||47.8%||Pass|
|Valuation||Normalized P/E < 20||11.50||Pass|
|Dividends||Current Yield > 2%||4.9%||Pass|
|5-Year Dividend Growth > 10%||3.3%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at H&R Block last year, the company has kept the same four-point score. The stock, however, has had decent performance despite an up-and-down year for the company.
H&R Block is well-known as a preparer of tax returns. Yet live preparation has largely given way to tax software, presenting H&R Block with a conundrum in developing a long-term strategy. Moreover, given that HSBC
H&R Block had tried to muscle up against rival Intuit
Late last year, the stock plunged after H&R Block announced earnings that missed expectations. But the better news was that the company had completed the sale of its RSM McGladrey consulting business, one of its non-core businesses that had drawn attention away from its primary tax-preparation services. In the long run, focusing on tax-prep seems like the best way for H&R Block to make the most of its well-known brand.
In the long run, for H&R Block to get closer to perfection, it needs to find a way to answer Intuit in the tax software realm. Without draws like refund-loans to pull in customers, H&R Block could be facing big problems going forward.
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. The Motley Fool owns shares of Wal-Mart. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Wal-Mart. 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.