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 Republic Services (NYS: RSG) 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 Republic Services.
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: S&P Capital IQ. Total score = number of passes.
When we looked at Republic Services last year, it did slightly better, weighing in with six points. Revenue that came to a standstill in the past year is the culprit for the one-point drop.
Republic plays second fiddle to Waste Management (NYS: WM) in the trash-collection and landfill industry. Bm-wut with Republic's territory including some of the highest-growth areas of the country in recent years, including Sunbelt cities like Las Vegas, Republic hopes that it will be able to hunt down the top dog in time.
But as times have stayed tough for the economy, there's more competition in the industry. Waste Management has a huge presence in the lucrative North American recycling market, while other companies like Veolia Environnement (NYS: VE) and Covanta Holding (NYS: CVA) are also aiming to stake their claim to the riches of refuse. Waste Connections (NYS: WCN) and Stericycle (NAS: SRCL) also have smaller parts of the market, although Stericycle's biohazard niche makes it less of a direct competitor.
Garbage has captured the attention of the investing community, though. With ETFs like Market Vectors Environmental Services (NYS: EVX) giving investors easy ways to get a stake in Republic and its peers, people are starting to see the value of waste.
For Republic to reach perfection, it has to find ways to jump-start its growth. But with plenty of opportunities around the world for it to do so -- and a great dividend to enjoy while you wait -- Republic shares are worth a second look.
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.
Click hereto add Republic Services to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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 contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Waste Management and Covanta Holding. Motley Fool newsletter services have recommended buying shares of Veolia Environnement, Republic Services, Waste Management, and Stericycle, as well as writing a covered strangle position in Waste Management. 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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.