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 Sysco (NYS: SYY) 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 Sysco.
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: S&P Capital IQ. Total score = number of passes.
When we looked at Sysco last year, it had a slightly more impressive score of 5. The company's dividend growth fell below the 10% level, but its yield has risen on the back of a slightly higher payout and a lower share price.
As a supplier of food products to restaurants, hotels, universities, hospitals, and other institutions, Sysco has an enviable position atop its industry. Given rising prices for the food they need to make their products, many food-related companies, including H.J. Heinz (NYS: HNZ) and Kraft Foods (NYS: KFT) , have had to consider passing on higher costs through price hikes of their own. Sysco, in fact, was early in pushing its prices up, and the results have been reasonably good, as revenue has continued its gentle climb.
Recently, Sysco has struggled to find growth on its bottom line. Although an increase in overall restaurant activity bodes well for Sysco -- Chipotle (NYS: CMG) and Buffalo Wild Wings (NAS: BWLD) both reported 20% jumps in sales in their most recent quarters -- its gross margin has still dropped, costing it net income.
Despite its high dividend yield and its perception as a defensive stock, Sysco should do better in a strong economy than in a weak one. Once its thousands of business customers see recoveries of their own, the good times should pass through to Sysco -- and that could get it back on track toward becoming 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 out the best investments from the rest.
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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Buffalo Wild Wings and Chipotle. Motley Fool newsletter services have recommended buying shares of H.J. Heinz, Buffalo Wild Wings, Sysco, and Chipotle. 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 a disclosure policy.
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