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 (NYS: KO) 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 Coca-Cola.
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%
5 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Coke doesn't seem like the perfect stock with only five points. But as the stock market enters a rough patch, many defensive investors want what Coca-Cola has to offer: a stable consumer play with growth opportunities from emerging markets.
Coke needs no introduction as the world's leading beverage brand. With Wall Street analysts pegging it as "the ideal stock to own in a slower-growth" environment, Coke has the staying power that you want to protect your portfolio.
Many critics, however, point to the company's stagnant stock price over the past decade. But even though lofty valuations back in 2000 haven't given the stock room to grow, the company is certainly much different from what it was 10 years ago, having seen sales double and income jump more than fivefold.
The fact is that Coke has financial metrics that destroy the competition. Net margins crush not only rival PepsiCo (NYS: PEP) but also other drink players Dr Pepper Snapple (NYS: DPS) and Hansen Natural (NAS: HANS) . Returns on equity are also higher than its competitors.
Coke does face some challenges. Higher sugar prices have forced the company to warn of possible price increases. But with its brand loyalty, Coke's demand might not fall as much as some fear even at higher prices.
Coke's dividend growth isn't quite as impressive as Pepsi's in the last five years, and some slight dings on the balance sheet cost the stock a couple more points. But in an iffy market environment, Coke could be exactly what you want, even if it does fall short of 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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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.
At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of PepsiCo and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of PepsiCo, Hansen Natural, and Coca-Cola, 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 adisclosure policy.
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