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 CBRE Group (NYS: CBG) 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 CBRE Group.
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%
4 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With a score of 4, CBRE Group has some improvements to make to reach perfection. But the real estate company took a step in the right direction last week, and a recovering economy could give it even more support going forward.
CBRE is a commercial real estate services company, doing everything from advising owners on leasing and sales of properties and getting financing for new projects to coordinating with outside investors like pension funds to put money to work in real estate.
Unfortunately, commercial real estate hasn't been kind to many companies. Analysts expect real estate information service CoStar Group (NAS: CSGP) to see earnings per share drop 25% this year despite its pending acquisition of online real-estate listing serviceLoopNet (NAS: LOOP) . Even Chinese real estate services company E-House (NYS: EJ) will likely see earnings cut in half versus 2010 levels.
Last week, CBRE saw its shares vault higher after it announced third-quarter earnings that met expectations, jumping 20% from last year's levels. The news even helped push shares of peer Jones Lang LaSalle (NYS: JLL) higher as well. Even with the commercial real estate industry continuing to face the obstacles of a slow economy and a bad industry environment, CBRE is doing what it can to get through the tough times and build itself up for the next boom.
With all the big attention in real estate going to mortgage REITs like Annaly Capital (NYS: NLY) and American Capital Agency (NAS: AGNC) , CBRE isn't likely to get close to a perfect 10 any time soon. But when the commercial real estate market finally turns -- and eventually it will -- shareholders will likely look back at this tough time as the key to CBRE's success.
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 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. The Motley Fool owns shares of Jones Lang Lasalle and Annaly Capital. Motley Fool newsletter services have recommended buying shares of Jones Lang Lasalle and LoopNet. 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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