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 Georgia Gulf (NYS: GGC) 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 Georgia Gulf.
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 four points, Georgia Gulf doesn't have perfect chemistry with its investors. The chemical and household products company has seen some recent growth, but despite an attractive valuation, it has both considerable debt and pretty thin margins.
Most people have probably never heard of Georgia Gulf. The company makes industrial chemicals for construction and industrial purposes, showing up in vinyl-based home improvement products, high-performance plastics, and paper production, among other things.
For many, the company just showed up on their radar screens yesterday, when CEO Paul Carrico noted that U.S. chemicals producers actually became net exporters for the first time in 2010. With favorable exchange rates making the U.S. a low-cost producer, Carrico and its peers could see further gains down the road.
For now, though, Georgia Gulf doesn't stand up well to the competition. Huntsman (NYS: HUN) , Rockwood Holdings (NYS: ROC) , and Olin (NYS: OLN) all have better margins and returns on equity, and Huntsman and Olin even pay sizable dividends. Georgia Gulf's low valuation makes up for some of those shortcomings, but its competitors aren't that much more expensive on an earnings-multiple basis.
Georgia Gulf has a long way to go before it becomes a perfect stock. Even if favorable macroeconomic trends continue, the company needs to pay down debt and improve its efficiency to get its numbers up to snuff.
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 thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Fool owns shares of and has written puts on Rockwood Holdings. 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 adisclosure policy.
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