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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if optionsXpress Holdings (Nasdaq: OXPS ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 optionsXpress.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||15.5%||pass|
|1-Year Revenue Growth > 12%||2.3%||fail|
|Margins||Gross Margin > 35%||76.4%||pass|
|Net Margin > 15%||23.4%||pass|
|Balance Sheet||Debt to Equity < 50%||0.0%||pass|
|Current Ratio > 1.3||1.19||fail|
|Opportunities||Return on Equity > 15%||17.0%||pass|
|Valuation||Normalized P/E < 20||18.51||pass|
|Dividends||Current Yield > 2%||0.0%||fail|
|5-Year Dividend Growth > 10%||0.0%||fail|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
optionsXpress weighs in with a fairly strong score of 6. As the major players in the brokerage industry engage in a bloody price war, this smaller competitor has carved out a potentially lucrative niche for itself.
Over the past year, discount brokers have started cutting commissions and offering free ETF trading. Schwab (NYSE: SCHW ) was the first mover, but Fidelity, Vanguard, and TD AMERITRADE (Nasdaq: AMTD ) all eventually followed suit with offerings of their own.
But so far, optionsXpress has stayed out of the fray. With its focus on options, the company caters to a more sophisticated set of investors who prize strong tools and research as highly as good value. But more importantly, because options are never long-term investments, account holders have to keep trading, generating repeat commissions for the company. That's a strategy that fellow niche dweller Interactive Brokers (Nasdaq: IBKR ) has also used, although its market-making woes during the financial crisis pulled its results down.
Unlike E*TRADE Financial (Nasdaq: ETFC ) , which got itself mired in the subprime mortgage crisis, optionsXpress sports a debt-free balance sheet, healthy net margins, and a solid return on equity. That may get the options broker some attention as a potential takeover candidate. Regardless, even though optionsXpress isn't perfect, it looks like it's on the right track.
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.
Click here to add optionsXpress to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.