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, and then decide whether Tyco International (NYS: TYC) 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 the 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 Tyco International.
What We Want to See
Pass or Fail?
Five-year annual revenue growth > 15%
One-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%
Five-year dividend growth > 10%
4 out of 9
Source: S&P Capital IQ. NM = not meaningful due to multiple spinoffs. Total score = number of passes.
Since we looked at Tyco International last year, the company has lost two points: Revenue has dropped, and the stock has roughly broken even over the past year.
Tyco was once a huge conglomerate with a wide range of businesses in industries spanning from medical equipment to electronics. It competed against fellow conglomerates 3M (NYS: MMM) and Honeywell (NYS: HON) in trying to pick up smart acquisitions. Yet over the years, Tyco has reversed course and steadily divested itself of many of its businesses, spinning them off to shareholders and leaving the original parent company to get smaller and smaller.
As a result, going forward, Tyco will look nothing like it did even a few months ago. That's because the company recently spun off its home security business into separately traded ADT (NYS: ADT) while also merging its flow-control segment with former competitorPentair (NYS: PNR) . That leaves the original Tyco focusing solely on commercial fire protection and security services.
Unfortunately, Tyco is still dealing with bad practices from its past. Last month, the company paid $26 million to settle alleged violations of the Foreign Corrupt Practices Act. With a subsidiary pleading guilty to charges, Tyco cooperated with the investigation, and the Justice Department took notice of that in its statement about the settlement.
For Tyco to improve, it obviously can't rely on any further spinoffs. Rather, it's going to have to focus on its remaining core business if it wants to get closer to perfection.
No stock is a sure thing, but some stocks are a lot closer to perfection 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.
No matter what industries you focus on, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name 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 Tyco International Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 3M. 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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