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 AllianceBernstein (NYS: AB) 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 AllianceBernstein.
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 9
Source: S&P Capital IQ. NM = not meaningful; AllianceBernstein has no significant current assets or current liabilities. Total score = number of passes.
When we looked at AllianceBernstein last year, it also weighed in with a score of 5. The money manager saw its revenue growth come to a halt in the last 12 months, and despite an attractive dividend yield, the payout is still a shadow of what it was before the financial crisis.
When it comes to actively managed mutual funds, it often pays to bet on the house. While markets rise and fall, money managers keep a fairly constant stream of cash coming in through asset management fees. Although they get a haircut in revenue when fund asset levels drop, companies like Brookfield Asset Management (NYS: BAM) , Janus Capital (NYS: JNS) , and AllianceBernstein keep raking in attractive profit margins through thick and thin.
But competition from exchange-traded funds threatens the long-term viability of mutual funds. With ETF giants State Street (NYS: STT) , BlackRock (NYS: BLK) , and Vanguard leading an even larger group of up-and-coming ETF providers including discount-broker Schwab (NYS: SCHW) , AllianceBernstein could find itself selling buggy whips to a crowd that has moved on to better and brighter things.
For AllianceBernstein to get back its growth, it needs to move beyond its traditional focus and find a way to capitalize on new trends. Without that strategic initiative, AllianceBernstein could stay in the midrange doldrums on our 10-point scale for a long time.
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. Motley Fool newsletter services have recommended buying shares of Brookfield Asset Management, BlackRock, and Charles Schwab. 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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