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 CYS Investments (NYS: CYS) 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 CYS Investments.
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%
6 out of 9
Source: S&P Capital IQ. NM = not meaningful; CYS paid its first dividend in Oct. 2009. Total score = number of passes.
Since we looked at CYS Investments last year, the company formerly known as Cypress Sharpridge has kept its score unchanged. The shares have performed well and its dividend remains high, although some foresee trouble ahead for the industry.
CYS is just one of the many mortgage REITs that have captured the attention of dividend-hungry investors. With their highly leveraged bets using mortgage-backed securities, mortgage REITs have generated double-digit-percentage dividend yields for years now. CYS was particularly successful in 2011, posting the top return among a big group of its mortgage-REIT peers.
Conditions are changing in the industry, though, and it's having an effect on the income that shareholders are getting from CYS and its rivals. Annaly Capital (NYS: NLY) , Chimera Investment (NYS: CIM) , and American Capital Agency (NAS: AGNC) have all had to cut back on their dividend payments as a result of tighter interest rate spreads eating into profits. CYS's dividend has come down by a sixth in the past year.
In the end, CYS will almost certainly follow the macroeconomic tides that govern interest rates in the mortgage market. Investors are nervous how long the good times can last, but for now, CYS has navigated the threats to its success well enough to generate good returns.
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 in this article. The Motley Fool owns shares of Annaly Capital. Motley Fool newsletter services have recommended buying shares of Annaly Capital. 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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