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 look for them. Let's discuss the ideal qualities of a perfect stock, and then decide if PriceSmart
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 the 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 profit, 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 PriceSmart.
What We Want to See
Pass or Fail?
|Growth||Five-year annual revenue growth > 15%||18.6%||Pass|
|One-year revenue growth > 12%||21.5%||Pass|
|Margins||Gross margin > 35%||15.8%||Fail|
|Net margin > 15%||3.2%||Fail|
|Balance Sheet||Debt to equity < 50%||20.9%||Pass|
|Current ratio > 1.3||1.4||Pass|
|Opportunities||Return on equity > 15%||16.3%||Pass|
|Valuation||Normalized P/E < 20||36.4||Fail|
|Dividends||Current yield > 2%||0.8%||Fail|
|Five-year dividend growth > 10%||30.3%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at PriceSmart last year, the company has held onto its six-point score. Even though the stock has jumped about 15% in the past year, it has taken investors on a big rollercoaster ride along the way.
If you've ever been in a warehouse club store, you'd recognize PriceSmart's business model. Costco
But PriceSmart hasn't had clear sailing lately. On one hand, the company has its sights on growth opportunities in South America, but economic growth in the emerging economies of that continent has started to slow. On the other hand, PriceSmart also faces substantial competition from international divisions of Wal-Mart
You can see the headwinds that PriceSmart is facing in Latin America in the results of other companies there. For instance, fast-food franchise giant Arcos Dorados
For PriceSmart to improve, it needs to get earnings growing fast enough to get its premium valuation down to earth. That, plus a further improvement to its dividend, could easily move PriceSmart toward perfection in the years to come.
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate 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 Arcos Dorados, Costo, and Mercadolibre. Motley Fool newsletter services have recommended buying shares of eBay, Costco, Mercadolibre, and PriceSmart. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.