Is Standard Pacific the Perfect Stock?
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 Standard Pacific (NYS: SPF) 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:
With those factors in mind, let's take a closer look at Standard Pacific.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(28.3%)||Fail|
|1-Year Revenue Growth > 12%||(33.7%)||Fail|
|Margins||Gross Margin > 35%||21.3%||Fail|
|Net Margin > 15%||(5.5%)||Fail|
|Balance Sheet||Debt to Equity < 50%||223.5%||Fail|
|Current Ratio > 1.3||8.86||Pass|
|Opportunities||Return on Equity > 15%||(8.1%)||Fail|
|Valuation||Normalized P/E < 20||67.70||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Standard Pacific barely build a score by notching a single point. The homebuilder has taken a particularly hard hit from the housing bust, and even somewhat positive news recently hasn't established a turnaround.
Everyone knows how hard homebuilders got burned when the housing bubble ended. Toll Brothers (NYS: TOL) , PulteGroup (NYS: PHM) , and Hovnanian (NYS: HOV) are just a few of the many stocks that have seen their revenues plummet in the past five years. But with its focus on California, Standard Pacific felt a lot more pain than many of its more geographically diverse peers.
Moreover, Standard Pacific has a lot more going against it than some of its competitors. At the beginning of the year, the company had more than $1.2 billion in existing home inventory, yet it's planning to make huge amounts of new investment in land this year. That's a calculated gamble, but with huge amounts of debt on its balance sheet, it's one that could backfire on the company sooner than it pays off.
Meanwhile, even after a sharp drop, Standard Pacific still carries a high valuation. Although investors expect it to be profitable next year -- something they don't expect from many other homebuilders, such as KB Home (NYS: KBH) -- shares currently fetch 35 times forward earnings estimates. That will make it hard for investors to reap much upside even if things go well.
Just yesterday, Standard Pacific's shares briefly rose more than 10% before finishing lower on the day. Investors reacted positively at first to the company's increase in new orders and work backlog, but the company still lost money, and analysts don't expect Standard Pacific to be profitable until 2012.
Standard Pacific isn't perfect, and it will take a big win on its land-grab bet for it to turn things around. That's a tough play even for a speculative investor to make.
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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At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended shorting Standard Pacific. 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 Fool has adisclosure policy.
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