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 Leggett & Platt 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 Leggett & Platt.
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 Leggett & Platt last year, the company has kept its three-point score for the third year in a row. But the stock has soared on enthusiasm about the rebounding housing market, rising more than 30% over the past year.
Leggett & Platt is an interesting company. It makes furniture for consumers, but it also serves the business community with products like automotive interior trim and seating. One particularly important driver for its commercial segment came from big orders from J.C. Penney , which has been using Leggett to help it revamp its stores to give them a more inviting and modern appearance.
In recent years, Leggett has seen sales bounce back somewhat since the housing bust, but revenue and income are both well below their mid-2000s levels. But enthusiasm that the housing market is getting stronger has lifted stocks across the industry, with Ethan Allen Interiors and La-Z-Boy both near 52-week highs.
In its most recent quarter, Leggett posted earnings at the high end of the company's previous guidance and reported a record for earnings per share for the full 2012 year. Revenue gains have been harder to come by, but Leggett is making the most of its sales, with reasonable profit margins.
For Leggett to improve, it needs to keep capitalizing on improving conditions in the economy. If the housing recovery is actually happening this time after several false starts in past years, then Leggett should be able to capture a big part of the gains and potentially get closer to 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.
Leggett may be benefiting from J.C. Penney's turnaround attempts, but the big-box retailer has been a train wreck whose comeback always seems just around the next earnings corner, but people are beginning to doubt if CEO Ron Johnson can weave the same magic that he did at previous employers. Investors wondering whether J.C. Penney is a buy today are invited to claim a copy of The Motley Fool's must-read report on the company. Learn everything you need to know about the company's turnaround -- or lack thereof -- and as a bonus, you'll receive a full year of expert guidance and updates as key news develops. Simply click here now for instant access.
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The article Has Leggett & Platt Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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