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?
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 General Mills, Inc. (NYSE:GIS).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 5.8% | Fail |
| 1-year revenue growth > 12% | 8.7% | Fail | |
| Margins | Gross margin > 35% | 37.3% | Pass |
| Net margin > 15% | 10.6% | Fail | |
| Balance sheet | Debt to equity < 50% | 100.2% | Fail |
| Current ratio > 1.3 | 0.80 | Fail | |
| Opportunities | Return on equity > 15% | 22.7% | Pass |
| Valuation | Normalized P/E < 20 | 18.72 | Pass |
| Dividends | Current yield > 2% | 2.8% | Pass |
| 5-year dividend growth > 10% | 10.8% | Pass | |
| Total score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at General Mills last year, the company has kept its five-point score for the third year in a row. The stock has done quite well, though, rising more than 20% over the past year.
