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 and then decide whether 3M
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. Although 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 a 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.
- Moneymaking 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 3M.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.0%||Fail|
|1-Year Revenue Growth > 12%||13.3%||Pass|
|Margins||Gross Margin > 35%||47.9%||Pass|
|Net Margin > 15%||15.3%||Pass|
|Balance Sheet||Debt to Equity < 50%||33.3%||Pass|
|Current Ratio > 1.3||2.14||Pass|
|Opportunities||Return on Equity > 15%||28.0%||Pass|
|Valuation||Normalized P/E < 20||18.02||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||4.3%||Fail|
|Total Score||8 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
3M posts an attractive score of 8. The company is coming out of the recession firing on all cylinders and falls just short of perfection.
You may know 3M best for its Post-it notes and other consumer products, but 3M makes a wide array of products for several different industries, ranging from medical and surgical supplies and optical film for LCD displays to industrial abrasives and fluids for technology manufacturing. The company rivals industrial conglomerates General Electric
Lately, the company has made a number of acquisitions designed to shore up its presence in a number of interesting industries. Last year, the company bought biometric ID firm Cogent, securing its foothold in an industry marked by small players such as L-1 Identity Solutions
Despite concerns that some have about the domestic economy, 3M remains optimistic about its opportunities both in the U.S. and abroad. CEO George Buckley said during a recent conference call that he believes "3M's growth and that of the U.S. economy is still going strongly led by emerging markets." That optimism has pushed the stock to all-time highs recently. And with much faster-growing sales in emerging-market countries such as India, China, and Brazil than it's getting from the U.S., 3M looks poised to capitalize on global growth wherever it appears.
Making a huge company like 3M grow its already significant revenue and dividend payouts at a fast enough clip to meet our desired goals is always tough. Yet even if 3M never makes it to perfection, it's still demonstrating that it has what it takes to succeed in a quickly evolving economy.
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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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.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and 3M and creating a diagonal call position in Johnson & Johnson. We Fools don't 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.