Last week, I wrote volume 1 of a series of articles related to what I like to call "Real Deal" stocks. Real Deal stocks are stocks that I believe are worth strong consideration as buys for long-term investors. "Real Deal" is an acronym that refers to the following metrics:
- R - Revenue Growth
- E - Equity (more specifically, Return on Equity)
- A - Assets (more specifically, Return on Assets)
- L - Leverage (more specifically, Financial Leverage)
- D - Dividend Growth
- E - Earnings Growth
- A - Advanced Metrics
- L - Long-Term Price Returns
When reviewing whether or not a stock is a real deal stock, the stock has to pass criteria set forth for seven out of the eight metrics listed above. For volume 2, I will be looking at the following stocks from the chemicals industry:
- Airgas, Inc. (ARG)
- Air Products and Chemicals, Inc. (NYSE:APD)
- Dow Chemical Company (NYSE:DOW)
- Eastman Chemical Company (NYSE:EMN)
- FMC Corporation (NYSE:FMC)
- Praxair, Inc. (NYSE:PX)
NOTE: One thing I didn't mention in volume 1 of this article is that while the metrics used will not change, the criteria individual companies are gauged against will vary slightly based on the industry under review.
In order to pass the revenue growth criterion of a Real Deal stock, the stock has to have averaged annual revenue growth of 4% or higher over the last five years.
Looking at the chart below, you can see that only Air Products & Chemicals does not pass this criterion.
Equity (Return on Equity)
In order to pass the equity criterion of a Real Deal Stock, the stock has to have averaged return on equity over 10% over the past five years.
Looking at the chart below, you can see that Dow Chemical, Eastman Chemical, and Airgas pass the criterion for this metric, while the other three companies do not.
Assets (Return on Assets)
In order to pass the assets criterion of a Real Deal stock, the stock has to have averaged return on assets over 5% over the past five years.
Looking at the chart below, you can see that, just like with return on equity, three of the companies pass this criterion, while three of them fail. The three failing companies (Praxair, Air Products & Chemicals, and FMC) have negative returns on assets.
Leverage (Financial Leverage)
In order to pass the leverage criteria of a Real Deal stock, the stock has to have financial leverage of 1 or less over the past year.
Looking at the chart below, you can see that Air Products & Chemicals and Dow Chemical Company are the two stocks that pass the criterion for this metric, as the other four companies all have financial leverage values greater than 1.
In order to pass the dividend growth criterion of a Real Deal stock, the stock has to have averaged annual dividend growth of 5% or higher over the past five years.
Looking at the chart below, you can see that Dow Chemical is the only company that doesn't pass the criterion for this metric.
In order to pass the earnings growth criterion of a Real Deal stock, the stock has to have averaged earnings growth of 5% or higher over the past five years.
Looking at the chart below, you can see that all six companies pass the criterion for this metric.
For Advanced Metrics, I will be looking at two items: the value score and the fundamental score calculated by YCharts. Details regarding these two scores can be found here and here. In order to pass this criterion, stocks need to have a fundamental score of 7 or higher and a value score of 5 or higher.
Looking at the charts below, you can see that Dow Chemical is the only company that doesn't pass the fundamental score criterion of this metric, while FMC is the only company that doesn't pass the value score criterion of the metric.
Long-Term Price Returns
In order to pass the long-term total price returns criterion of a Real Deal stock, the stock has to have beaten the S&P total return over the course of the past ten years.
Looking at the chart below, you can see that Dow Chemical is the only company out of the six that did not pass this criterion.
Let's take a look at how each stock measures up.
Air Products and Chemicals
Looking at the table above, you can see that Airgas and Eastman Chemical are the two companies that have passed the necessary criteria to be considered "Real Deal" stocks, each having failed just one metric. The other five companies all failed between 3 to 4 metrics.
Some recent developments regarding Airgas includes its reorganization of its North Central distribution region along with its acquisition of Welding & Therapy Service, Inc. Airgas seems to be making correct strategic decisions that will lead to long-term growth as it continues to expand (having acquired 11 businesses since the start of its fiscal year).
Some recent developments regarding Eastman Chemical include its deal to acquire Commonwealth Laminating & Coating, Inc. along with its plans to increase capacity at its Longview, Texas site. Eastman Chemical has a solid history of strong management and was recently named a 2014 World's Most Ethical Company by the Ethisphere® Institute.
While I believe that Eastman Chemical and Airgas are both great long-term investments, it doesn't mean that the other four companies included in this article should be avoided.
Two things to keep in mind when looking at this article (or future volumes):
1. The "real deal" criteria is not a one-stop shop for stock buying. It should only be the first step in taking a comprehensive look at investment opportunities. As always, I suggest individual investors perform their own research before making any investment decisions.
2. The criteria I have set up for "real deal" stocks heavily favors dividend paying stocks, since non-dividend paying stocks will have to pass all other criteria in order to be considered a passing stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.