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 Ambev (NYSE: ABV ) 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 Ambev.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||9.6%||Fail|
|1-Year Revenue Growth > 12%||8.8%||Fail|
|Margins||Gross Margin > 35%||66.5%||Pass|
|Net Margin > 15%||30%||Pass|
|Balance Sheet||Debt to Equity < 50%||27.6%||Pass|
|Current Ratio > 1.3||1.22||Fail|
|Opportunities||Return on Equity > 15%||32.5%||Pass|
|Valuation||Normalized P/E < 20||20.92||Fail|
|Dividends||Current Yield > 2%||3.9%||Pass|
|5-Year Dividend Growth > 10%||46.3%||Pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor’s. Total score = number of passes.
Ambev pours up an attractive score of 6. As part of an even larger network, the Brazilian beverage maker focuses on one of the fastest-growing regions in the world.
Ambev is a subsidiary of the larger Anheuser-Busch InBev (NYSE: BUD ) , which itself has had a long and storied history of mergers and acquisitions. Ambev produces a wide range of beers and soft drinks throughout Central and South America, as well as distributing PepsiCo (NYSE: PEP ) products in Brazil and elsewhere in Latin America.
Thanks to its presence in a growth market, Ambev hasn’t seen the same top-line pressure that the recession caused for some of its brewing competitors, such as Molson Coors (NYSE: TAP ) . Ambev’s growth has not only defied Molson’s contraction over the past five years to remain positive but also outpaces the growth of Mexican rival FEMSA (NYSE: FMX ) . And although its Anheuser-Busch InBev parent is saddled with debt, Ambev has a relatively clean balance sheet.
As long as Brazilian growth continues to help the entire continent expand faster than the U.S. and other developed nations, Ambev should continue to grow. Its shares are somewhat pricey right now, but with a good dividend, Ambev might get even 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.