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 General Growth Properties (NYS: GGP) 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 General Growth Properties.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
3 out of 9
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.
With just three points, General Growth Properties doesn't seem to be building on a strong foundation. But the real estate investment trust has done fairly well when you consider that it emerged from bankruptcy less than a year ago.
General Growth is a REIT that focuses largely on operating shopping malls. It's second only to Simon Property Group (NYS: SPG) in the mall space. General Growth got itself into trouble during the credit crisis, when despite having positive operating cash flow and equity on its balance sheet, it couldn't get new financing for its debt and therefore had to file for bankruptcy protection.
After a fight that involved renowned investor Bruce Berkowitz joining with Brookfield Asset Management (NYS: BAM) and Pershing Square Capital Management that ended up beating out Simon Property's counteroffer, General Growth was one of the rare bankrupt companies that actually performed well for shareholders. Returns have been especially impressive when you account for the REIT's spinoff of Howard Hughes Corp. (NYS: HHC) , which included some of the old General Growth's best assets that were handpicked for the new entity.
Until the recent market bloodbath, shares had performed quite well. But now that shares are cheaper, another positive sign has emerged: Insiders have shown some buying interest in the shares. General Growth's CEO and COO both bought substantial positions last week. That suggests that after a long tough period for commercial real estate, conditions may finally be getting better.
General Growth is far from perfect yet, with negative earnings and revenue. But over the long run, the REIT could well pull itself back up toward its former glory.
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 thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Howard Hughes Corp.Motley Fool newsletter serviceshave recommended buying shares of Brookfield Asset Management. 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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