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 Equifax (NYS: EFX) fits the bill.
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 Equifax.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
4 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just 4 points, Equifax doesn't put up a very creditworthy score. The credit rating agency may be vital to the financial health of borrowers across the nation, but as a business, its prospects aren't as clear.
Equifax is one of the three major credit rating bureaus. Its primary competitors in that business, TransUnion and Experian, aren't publicly traded on U.S. exchanges, but FICO-score provider Fair Isaac (NYS: FICO) is. In addition, Equifax provides employment and income verification information to businesses, where it competes with payroll companies Automatic Data Processing (NAS: ADP) and Paychex (NAS: PAYX) .
Of these, Fair Isaac probably represents the biggest threat, as its FICO score is popular among consumers and lenders alike. But Equifax and its credit bureau peers have responded with VantageScore, a rival scoring system. Given that the bureaus are also Fair Isaac's biggest customers, the right for domination should be interesting to watch.
As for Equifax, it falls in the midrange on most of its attributes, with a reasonable but not cheap valuation, a good but not great dividend yield, and slow but steady growth. Equifax isn't perfect, but if you're looking for a stable income-producing stock, it might be worth a closer look.
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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At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of Paychex and Automatic Data Processing. 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 adisclosure policy.
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