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 Fomento Economico Mexicano (NYS: FMX) 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 Femsa.
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.
Since we looked at Femsa last year, the company has kept its five-point score. But the stock has performed nicely, rising nearly 40% over the past year.
For a long time, investors excited about emerging markets in general and the Western Hemisphere in particular tended to stick with the names best known among the developed-market world. That led to a focus on Petrobras (NYS: PBR) , Vale (NYS: VALE) , and other natural-resources plays that U.S. investors already knew a lot about.
But more recently, investors have started emphasizing the growing middle-class populations within emerging-market countries and are paying closer attention to the consumer-facing companies that serve those populations. Femsa has latched onto that trend as a huge bottler of Coca-Cola (NYS: KO) , as well as having a major strategic investment in Heineken Group as a result of having sold its beer business to the Dutch beer maker.
Still, Femsa doesn't have its industry all to itself. With competition from AmBev, Femsa won't be able to expand unfettered throughout Latin America without a fight. In the face of that competition, Femsa has recently taken steps to concentrate on its core business. By selling its Quimiproductos subsidiary to Ecolab (NYS: ECL) , which focuses on sanitizing and water-treatment products, Femsa can pay more attention to beverage production.
For Femsa to improve, it needs to work on boosting internal efficiency enough to get returns on equity higher. Once that happens, continuing dividend growth could get Femsa closer to perfection.
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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The article Has Femsa Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Ecolab. Motley Fool newsletter services recommend Petrobras and Coca-Cola. 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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