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 Lazard (NYS: LAZ) 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 Lazard.
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 Lazard last year, the company has dropped two points, with returns on equity plunging while valuations soared. Shares of the investment firm rose nearly 20% over the past year, but earnings weren't able to keep up.
Times have been tough at many investment management companies, as low interest rates and a weak economy have held back the levels of activity that traditionally boosted their profits. Fellow asset managers Invesco (NYS: IVZ) and Janus Capital (NYS: JNS) have also seen profit drops as investors flee some of their funds. Moreover, slowness at Lazard's mergers-and-acquisitions consulting business prompted the company to cut back on costs. Given the company's extremely high compensation costs, even in comparison to the generous Morgan Stanley (NYS: MS) and Goldman Sachs (NYS: GS) , cost-cutting makes plenty of sense.
But signs are finally pointing to a potential rise in mergers and acquisitions activity. Given how much money private capital companies have in their coffers, the pressure to put that money to work has been increasing, especially as the stock market has risen this year. Any resulting boost could be a significant driver for Lazard's results looking forward.
Yesterday, Lazard released third-quarter results, topping earnings estimates and announcing further cost-cutting measures. Using staff reductions, Lazard expects to cut $125 million per year, moving it closer to compensation levels at its competitors. The company also boosted its share repurchase program and made some strategic moves to make its board more independent.
For Lazard to improve, it really needs an economic recovery to reverse its revenue slowdown. Without increased activity, Lazard will have a hard time getting much 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.
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The article Has Lazard Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Goldman Sachs. 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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