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 Texas Industries (NYS: TXI) 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.
Moneymaking 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 Texas Industries.
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%
1 out of 9
Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.
Since we looked at Texas Industries last year, the company has made no progress from its 1-point score. Yet the stock has soared 60% as a turnaround in the housing market has given investors new hope for the company.
As a producer of cement and construction aggregates, Texas Industries' fortunes are tied to the construction industry. For years, Texas Industries and peers Cemex (NYS: CX) , Vulcan Materials (NYS: VMC) , and Martin Marietta (NYS: MLM) have all struggled with falling annual sales, and only Martin Marietta has been successful in eking out even a modest profit after considering one-time items.
But a rebound in housing is good news for Texas Industries and its peers, as non-residential construction usually follow the same path as homebuilding. Back in July, that trend led to surprisingly good performance, with the company posting breakeven results rather than an expected substantial loss. A couple of months ago, Texas Industries got an upgrade from a research firm that gave investors new optimism, sending shares up more than 10% in a single day.
Looking forward, though, the construction industry still has work to do to return to sustained profitability. Texas Industries' big move may pale in comparison with drywall-maker USG's (NYS: USG) triple off its lows late last year, but it still incorporates a lot of positive expectations -- expectations that could get foiled if the future isn't as bright as investors hope.
For Texas Industries to improve, it needs the long-awaited recovery in housing to happen in earnest. As a recovery appears to take shape, the company will then need to deliver on its growth opportunities.
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 Texas Industries Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger and The Motley Fool have no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cemex. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.