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 Herman Miller (NAS: MLHR) 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 Herman Miller.
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.
Since we looked at Herman Miller last year, the company hasn't been able to improve on its three-point score. Shareholders aren't happy with the stock's 30% decline in the past year, either.
Herman Miller is the company behind the ergonomically sophisticated Aeron chair. With a wide array of products for office applications, including desks, modular systems, storage products, and other furniture, Herman Miller does well when businesses are earning enough profits that they can afford to buy its goods.
Unfortunately, businesses don't seem any better off than consumers when it comes to high-priced furniture items. We've recently seen that phenomenon play out in the mattress space, where Tempur-Pedic (NYS: TPX) , Select Comfort (NAS: SCSS) , and Mattress Firm (NAS: MFRM) have all seen their shares plunge in response to slowing sales and profit growth that left their stock valuations looking inflated. Similarly, recliner specialist La-Z-Boy (NYS: LZB) hasn't been able to keep its sales up either, and investors have lost patience with its poor performance.
For Herman Miller to improve, it really needs to see small businesses step up to the plate and increase their purchases. Until a much more robust economic recovery takes hold and encourages entrepreneurs to get back into the risk-taking business, Herman Miller and other companies that cater to the needs of business customers will continue to struggle.
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. The Motley Fool owns shares of Tempur-Pedic. 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.