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 Matthews International (NAS: MATW) 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 Matthews International.
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 four points, Matthews International doesn't look like it's headed for perfection anytime soon. But the funeral services company has some attractive traits that its competitors lack.
Matthews makes and sells funeral-related products, including caskets, cremation urns, and gravesite memorials. The company faces more competition than you might expect, with specialists including Stewart Enterprises (NAS: STEI) , Hillenbrand (NYS: HI) , and Service Corp. International (NYS: SCI) providing services for the same customers. In addition, big-box retailersCostco (NAS: COST) and Wal-Mart (NYS: WMT) also sell caskets.
What sets Matthews apart, however, is its international business. While Service Corp., Hillenbrand, and Stewart all get 80% or more of their revenue from the U.S., international sales make up almost 40% of Matthews' revenue. Granted, with most of its international sales coming from Europe, current economic conditions could pose problems. But overall, the geographical diversification should benefit Matthews over the long run.
Unfortunately, Matthews' dividend lags well behind its peers, with StoneMor Partners (NAS: STON) leading the way with an impressive 8% payout. Slow growth also helps keep the stock from being the most attractive candidate. If you think the company's international exposure will serve it well in the future, though, it wouldn't be ridiculous to consider it for your portfolio.
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 Caplingerdoesn't own shares of the companies mentioned. The Motley Fool owns shares of Wal-Mart, StoneMor Partners, Costco, and Hillenbrand.Motley Fool newsletter serviceshave recommended buying shares of Hillenbrand, Costco, and Wal-Mart, as well as creating a diagonal call position in Wal-Mart. 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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