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 Coca-Cola
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 Coca-Cola.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.6%||Fail|
|1-Year Revenue Growth > 12%||12.7%||Pass|
|Margins||Gross Margin > 35%||60.3%||Pass|
|Net Margin > 15%||18.3%||Pass|
|Balance Sheet||Debt to Equity < 50%||99.5%||Fail|
|Current Ratio > 1.3||1.11||Fail|
|Opportunities||Return on Equity > 15%||25.8%||Pass|
|Valuation||Normalized P/E < 20||24.75||Fail|
|Dividends||Current Yield > 2%||2.6%||Pass|
|5-Year Dividend Growth > 10%||8.6%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Coca-Cola last year, the company has kept its five-point score. But investors have enjoyed a nice run-up in the stock over the past year, with its recent split coming as welcome news for many shareholders.
It's impossible to argue with the sheer brand power of Coca-Cola. As the top-ranked brand in Interbrand's global brand ratings for 12 years running, the company sells billions of servings every day around the world. Yet while Coca-Cola dominates the U.S., it still has plenty of room to grow in emerging markets like China and India, where per-capita consumption is far lower.
Of course, rival PepsiCo
In addition, most of the concerns that hit Coca-Cola also apply to smaller competitors Dr Pepper Snapple
For Coca-Cola to improve, it needs to see Europe's slide end and for international growth to return to a stronger course. If macroeconomic trends work out in its favor, then Coca-Cola could get much closer to perfection in the years ahead.
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 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 PepsiCo, Coca-Cola, and McDonald's. Motley Fool newsletter services have recommended buying shares of Coca-Cola, PepsiCo, McDonald's, and Monster Beverage, as well as creating a diagonal call position in PepsiCo. 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.