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 H&R Block 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 H&R Block.
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.
Since we looked at H&R Block last year, the company has kept its four-point score for the third year in a row. But the stock has been anything but flat, rising 50% over the past year with its gains coming largely in just the past couple of months.
H&R Block has struggled in recent years, as its bricks-and-mortar business model failed to generate as much success as Intuit's TurboTax preparation software. Although H&R Block has responded with tax software of its own, TurboTax has superior brand awareness and the advantage of being the leader in the industry to support it. That has led to increased short-selling interest in H&R Block.
But H&R Block's stock got a big bounce from the fiscal cliff debate, which introduced yet more complexity into the tax code. With new upper-income brackets, differing phase-in amounts for the Medicare surcharge on wage and investment income, and the return of provisions phasing out personal exemptions and itemized deductions, H&R Block should see more people coming in for help in the 2013 tax year and beyond.
H&R Block has also been looking at its banking division with an eye toward making changes. Because of complicated regulatory rules, the division's status as a federal savings bank causes parent H&R Block to be subject to regulation as a savings and loan, which requires capital requirements. H&R Block would prefer to avoid such regulation while still being able to offer financial products and services to customers.
For H&R Block to improve, it needs to take full advantage of complex tax laws while they last. Without success in its core business, it'll be hard for H&R Block ever to make much progress 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.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
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The article Has H&R Block Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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