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 Universal Forest Products (NAS: UFPI) 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 Universal Forest Products.
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%
3 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With only three points, Universal Forest Products hasn't built much success lately. The building product supplier has had to deal with a tough environment in recent years, but some signs point toward a possible recovery in the works.
Universal makes a variety of materials for the construction industry, including manufactured housing, concrete forms, retail building materials, and products for commercial and residential construction. Its retail materials segment is the largest, and the company counts Home Depot (NYS: HD) as one of its major customers, accounting for around 30% of total sales in recent years.
In a poor housing market, the construction industry has been slow. But Universal has actually held up better than many of its peers. Builders FirstSource (NAS: BLDR) makes structural building products, and it has posted significant losses recently. Louisiana Pacific (NYS: LPX) is in a similar situation as it has waited for an upturn in housing as well. By contrast, even Universal's modest profitability puts it in rarefied air, especially given overcapacity in the market.
Yesterday, Universal shares soared after the company released earnings for the fourth quarter. The company announced higher sales along with an unexpected small profit after adjusting for one-time items. Given that the winter is Universal's off-season, the news was very encouraging. With Lumber Liquidators (NYS: LL) also having recovered from its summer swoon on news of positive developments in the housing market, it's entirely possible that building materials stocks have hit bottom.
For Universal to keep improving, it needs a strong summer season to confirm the uptrend. Once that happens, the stock could get its score up very quickly.
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 Universal Forest Products and Lumber Liquidators. Motley Fool newsletter services have recommended buying shares of Home Depot and Lumber Liquidators. 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.