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 Newell Rubbermaid (NYS: NWL) 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 Newell Rubbermaid.
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 Newell Rubbermaid last year, the company has maintained its four-point score. But shareholders have been happy to see the stock rise by more than 20% over the past year as the company continues its rebound from the painful financial crisis.
Newell Rubbermaid makes a wide array of well-known consumer products. Although its namesake Rubbermaid line of food storage products comes to mind first, it also is the company behind Calphalon kitchenware, Graco strollers, and Sharpie markers, among many other products.
Newell Rubbermaid therefore faces plenty of competition. Tupperware Brands (NYS: TUP) has done an excellent job of exporting its business model to emerging-market countries, challenging Newell Rubbermaid to keep up with its growth -- although in doing so, Tupperware has also exposed itself to a potential global slowdown. Meanwhile, now that 3M (NYS: MMM) has bought out the office products business of Avery Dennison (NYS: AVY) , it has a huge presence that Newell Rubbermaid has to fight against to maintain a segment that makes up more than 30% of its revenue.
To compete, Newell Rubbermaid has started restructuring itself to streamline its corporate structure. The move led to one-time charges in its most recent quarter, but by reducing the number of global business units it maintains while also making its production process more efficient, the company has cut costs and benefited more from big sales gains in its baby/parenting business and its professional segment. As higher costs have hurt Procter & Gamble (NYS: PG) and other consumer-products companies, Newell Rubbermaid was smart to try to get ahead of the cost-cutting curve.
For Newell Rubbermaid to improve, it needs to work on getting its debt down and its revenue growth back up. Steadily raising dividends could be the company's best bet in getting itself moving back toward perfection in the years ahead.
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 in this article. Motley Fool newsletter services have recommended buying shares of 3M and Procter & Gamble, as well as creating a diagonal call position in 3M. 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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