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 Lowe's
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 Lowe's.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||1.4%||Fail|
|1-Year Revenue Growth > 12%||1.7%||Fail|
|Margins||Gross Margin > 35%||35.2%||Pass|
|Net Margin > 15%||4.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||37.7%||Pass|
|Current Ratio > 1.3||1.21||Fail|
|Opportunities||Return on Equity > 15%||10.9%||Fail|
|Valuation||Normalized P/E < 20||16.74||Pass|
|Dividends||Current Yield > 2%||1.8%||Fail|
|5-Year Dividend Growth > 10%||29.7%||Pass|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Lowe's hasn't built perfection in its stock, which scores just four points. Growth has slowed considerably since the heyday of the housing boom, but future trends could help boost the home improvement retailer back toward its former glory.
The collapse in the housing market hurt many industries, from homebuilders to mortgage lenders. But as you'd expect, home improvement retailers haven't been immune from the pain. Home Depot
But as home prices stay low, many current homeowners are deciding that if they have to stay in their current homes, they might as well do renovations. With an index of remodeling activity up every month for more than a year, Lowe's, along with niche players Lumber Liquidators
The question is whether favorable trends can continue long enough to outlast the housing bust. If not, then improvement at Lo we's may prove to be only a brief respite. But if housing eventually hits bottom, the resulting flood of activity could well spell even greater demand for Lowe's products, lifting it back 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.
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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended Lowe's, Lumber Liquidators, and Home Depot, as well as recommending writing covered calls in Lowe's. The Motley Fool owns shares of Lumber Liquidators. 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.