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 St. Joe 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 St. Joe.
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%
2 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at St. Joe last year, the company has given back both points it gained from 2011 to 2012. But shareholders haven't really minded, because the stock has risen almost 40% in the past year.
St. Joe is a real estate development company with extensive land holdings in Florida. In recent years, it has been a hotbed of controversy as the focal point of a battle between major shareholder Bruce Berkowitz and short-seller David Einhorn.
In 2011, the stock remained in the middle of a tug of war between the two investing titans, with shares generally trending lower. But in the past year, things have started looking up for the company, with some asset sales leading to more optimism that St. Joe may be able to monetize its long-illiquid assets.
In what could be the last battle in the fight between Einhorn and Berkowitz, a federal appeals court ruled earlier this week against shareholders in a securities fraud lawsuit against St. Joe. Investors had argued that Einhorn's report included private information that he used as a basis to sell stock short before making it public. The court found that Einhorn merely repackaged public information, and therefore that St. Joe wasn't liable for failing to disclose it.
For St. Joe to improve, it needs to cash in on any upturn in the real-estate market it can get. Only by boosting revenue and profits does St. Joe have any hope of getting closer to perfection.
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.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
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The article Has St. Joe Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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