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 NewMarket
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 NewMarket.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.6%||Fail|
|1-Year Revenue Growth > 12%||15.4%||Pass|
|Margins||Gross Margin > 35%||26.7%||Fail|
|Net Margin > 15%||10.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||42.3%||Pass|
|Current Ratio > 1.3||3.09||Pass|
|Opportunities||Return on Equity > 15%||39.4%||Pass|
|Valuation||Normalized P/E < 20||16.81||Pass|
|Dividends||Current Yield > 2%||1.3%||Fail|
|5-Year Dividend Growth > 10%||40.1%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at NewMarket last year, the company has gained a point. A slight reduction in debt-to-equity gave the chemical stock the score boost, but what's really made shareholders happy is the stock's 30% gain in the past year.
NewMarket focuses on a fairly specialized business, making chemicals that work as additives to fuel as well as to engine lubricants. The company does a significant portion of its business with Royal Dutch Shell
Unfortunately, competitors abound in the industry. Berkshire Hathaway
But even in the face of competition, NewMarket has been performing quite well. In its most recent quarter, revenue grew nearly 11% while net income increased to almost $5 per share, beating estimates and sending shares soaring. Yet even after the gains, the stock still trades at a reasonable earnings multiple.
For NewMarket to keep improving, continuing its strong revenue growth is the clear next step. Higher margins will be tough in a competitive industry, but it may prove to be the move that eventually gets NewMarket 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.
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Fool contributor Dan Caplinger owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and ExxonMobil. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Chevron. 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.