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 Morgan Stanley (NYS: MS) 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 Morgan Stanley.
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%
3 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Morgan Stanley last year, the company hasn't improved on its three-point score. The stock has been stuck in the doldrums, though, with a 15% drop over the past year.
Morgan Stanley has been squarely in the limelight lately, and not in a good way. As lead underwriter for the Facebook (NAS: FB) IPO, Morgan Stanley found itself in the hot seat when the social media giant's IPO got off to a rough start, with trading glitches that led to opening-day delays eventually leading to severe price declines that have shaved off half of Facebook's value in just a few months.
Fallout from the Facebook debacle could severely hurt Morgan Stanley's future. In 2011, the company led all IPO underwriters with nearly $10 billion in proceeds, beating out Bank of America (NYS: BAC) and its Merrill Lynch unit, along with Goldman Sachs and JPMorgan (NYS: JPM) . Reputational damage could cost Morgan Stanley its leadership role, although the company is fighting hard to retain its edge.
Moreover, brokers are facing a tough environment right now. The rate environment has led to lower investment income, which has hurt both Goldman and E*TRADE Financial (NAS: ETFC) along with Morgan Stanley. With the Fed likely to keep rates low for a long time, those headwinds aren't going away anytime soon.
For Morgan Stanley to improve, it needs to get past the Facebook troubles and re-establish itself as a major Wall Street player. If it can do that, then its relatively cheap valuation gives the stock plenty of room to run.
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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The article Has Morgan Stanley Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Facebook, JPMorgan Chase, and Bank of America. Motley Fool newsletter services have recommended buying shares of Facebook and Goldman Sachs and formerly recommended JPMorgan Chase. 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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