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 Quad/Graphics (QUAD +0.61%) 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 Quad/Graphics.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Growth |
5-Year Annual Revenue Growth > 15% |
16.2% |
Pass |
|
1-Year Revenue Growth > 12% |
(4.3%) |
Fail | |
|
Margins |
Gross Margin > 35% |
22.6% |
Fail |
|
Net Margin > 15% |
1.4% |
Fail | |
|
Balance Sheet |
Debt to Equity < 50% |
99.9% |
Fail |
|
Current Ratio > 1.3 |
1.34 |
Pass | |
|
Opportunities |
Return on Equity > 15% |
3.1% |
Fail |
|
Valuation |
Normalized P/E < 20 |
7.86 |
Pass |
|
Dividends |
Current Yield > 2% |
6.3% |
Pass |
|
5-Year Dividend Growth > 10% |
NM |
NM | |
|
Total Score |
4 out of 9 |
Source: S&P Capital IQ. NM = not meaningful; Quad/Graphics started paying a dividend in May 2011. Total score = number of passes.
Since we looked at Quad/Graphics last year, the company has lost a point, with revenue actually falling from 2011 levels. The stock price hasn't produced big gains over the past year, although large dividends have added strongly to total returns for shareholders.
Quad/Graphics is a printing company, and as you'd imagine, the move toward digital publication has hurt the company recently, along with pretty much the entire printing industry. Competitor VistaPrint (VPRT +1.62%) has had trouble generating revenue, even though earnings haven't fallen below what analysts expect for the company. Although Quad/Graphics has managed to turn its bottom line around to yield a profit over the past 12 months after losses in 2010 and 2011, it still has work to do before investors can conclude that its major restructuring efforts are bearing fruit.
But Quad/Graphics has achieved some successes this year. Last month, the company announced a deal with Time Warner's (TWX +0.00%) Time division to handle printing for 85% of its magazines. The deal is worth more than $900 million, which should help Quad/Graphics' revenue woes.
One potential source of business could result from fallout at R.R. Donnelley (RRD +0.00%) following its mishandling of Google's (GOOG 0.42%) third-quarter-earnings report. As Google's financial printer and agent, Donnelley filed an incomplete preliminary draft of the quarterly report with the SEC, leading to a midday trading halt that disrupted the entire session prior to its scheduled release.
For Quad/Graphics to improve, it needs to follow through on a reasonably solid third-quarter performance to get revenue and profits moving in the right direction. The stock may never get to perfection, but it could still produce some gains for investors in the coming years.
Keep searching
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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