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 USG (NYS: USG) 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 USG.
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%
1 out of 9
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative normalized earnings. Total score = number of passes.
With only one point, USG isn't building much perfection. The company has taken a huge hit from the construction slowdown since the recession, and at least for now, there aren't any signs of relief coming anytime soon.
The G in USG stands for gypsum, which USG uses to make building materials used in walls, ceilings, and floors for both residential and commercial buildings. Beyond construction, the company also has applications in repairing roads and making ceramics.
Nevertheless, USG's main exposure is from residential construction, and that market has been terrible for years. Late last year, the company announced that 2011 would be "another difficult year," and its continuing revenue contraction and net losses have borne that out. Other companies that depend on a strong construction industry, including insulation makerOwens Corning (NYS: OC) and cement makersVulcan Materials (NYS: VMC) and Cemex (NYS: CX) , have seen similar struggles.
Particularly troubling is USG's big debt load. Despite consistent injections of capital from major shareholder Berkshire Hathaway (NYS: BRK.B) , USG will have to turn things around soon in order to keep its balance sheet manageable. If it can do so, USG may be a big value at these prices -- but if not, it may never emerge from its current problems, let alone become a perfect stock.
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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At the time thisarticle was published Fool contributorDan Caplingerowns shares of Berkshire Hathaway.Motley Fool newsletter serviceshave recommended buying shares of USG, Berkshire Hathaway, and Vulcan Materials. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Fool has adisclosure policy.
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