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 Lazard (NYS: LAZ) 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 Lazard.
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%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With a score of 5, Lazard gets a good part of the way to perfection. In a tough environment for investment banks, the company has done a reasonable job in holding up.
Lazard is a small investment bank that provides a variety of services. In addition to managing assets, the company also gives strategic and transactional advice on mergers, acquisitions, corporate restructuring, and raising capital. For instance, in July, Eastman Kodak (NYS: EK) hired Lazard to try to sell as much as 10% of its patent portfolio to raise capital. Earlier this year, the company provided advice on Mosaic's (NYS: MOS) spinoff from privately held Cargill as well as Vodafone's (NAS: VOD) sale of its stake in the French company SFR, worth about $11.3 billion.
Earlier this week, Lazard distinguished itself by posting promising results. Although its overall adjusted earnings missed estimates, investors were pleased with Lazard's financial advisory business. With involvement in the proposed mergers of Duke Energy (NYS: DUK) and Progress Energy (NYS: PGN) as well as Express Scripts and Medco Health Solutions (NYS: MHS) , Lazard has a promising pipeline that could provide healthy revenue down the road.
That growth could give Lazard the missing piece in its financial puzzle. With a little help from a more favorable market environment, Lazard could easily be a lot closer to perfection sooner than later.
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 contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Medco Health Solutions and Vodafone Group. 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 a disclosure policy.
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