Is Stanley Black & Decker the Perfect Stock?
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 Stanley Black & Decker (NYS: SWK) 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 Stanley Black & Decker.
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%
7 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With seven points, Stanley Black & Decker is helping investors build a pretty portfolio. The combination of the two toolmakers has proven to be a strong pairing that has brought real benefits to shareholders.
Following its 2010 merger, Stanley Black & Decker now represents the surviving entity from the former Stanley Works and Black & Decker. That combination has resulted in some strong cost savings, which the company handed out to shareholders in the form of a 20% dividend increase earlier this year, bolstering its status as a dividend aristocrat with a long streak of hikes over the years.
Yet the company isn't perfect. Snap-on Tools (NYS: SNA) has better returns on equity and margins, although it achieves them in part through greater leverage. The retailers Stanley Black & Decker depends on for its sales -- which include Home Depot (NYS: HD) , Lowe's (NYS: LOW) , and Sears Holdings (NAS: SHLD) -- have faced their own struggles with the housing bust and the slow economy.
Nevertheless, what Stanley Black & Decker enjoys is the fact that its products are consistently in demand. Whether you're a construction worker building a new home or a homeowner trying to fix yours up, you'll need the same tools -- and Stanley will be there to provide them for you. If the economy eventually picks up, then that should only help the company move closer to 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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At the time this article was published
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