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 whether CME Group (Nasdaq: CME ) 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 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 CME Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||27.5%||Pass|
|1-Year Revenue Growth > 12%||15.0%||Pass|
|Margins||Gross Margin > 35%||82.9%||Pass|
|Net Margin > 15%||31.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||12.5%||Pass|
|Current Ratio > 1.3||1.13||Fail|
|Opportunities||Return on Equity > 15%||4.8%||Fail|
|Valuation||Normalized P/E < 20||17.10||Pass|
|Dividends||Current Yield > 2%||1.96%||Fail|
|5-Year Dividend Growth > 10%||20.1%||Pass|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
CME Group weighs in with an impressive score of 7. Although the company has seen weak returns on equity lately, it has almost everything else we like to see in a stock.
CME Group runs the largest futures and options exchange in the world, with well-known names such as the Chicago Board of Trade and the Chicago Mercantile Exchange under its belt. You can trade anything from precious metals and currencies to weather futures on CME Group exchanges.
CME Group stands apart from its competitors because its clearinghouse is integrated within the company. That keeps customers within CME Group as they clear and settle their trades, creating a competitive advantage over rivals like Nasdaq OMX Group (Nasdaq: NDAQ ) .
After a big run-up in price during the last bull market, CME Group shares took a nasty hit during the market meltdown, and they've since struggled to advance beyond their initial bounce. Despite the increased interest in exchange stocks after NYSE Euronext (NYSE: NYX ) became a merger target, CME Group hasn't enjoyed nearly the spike that Nasdaq or CBOE Holdings (Nasdaq: CBOE ) shares experienced.
CME Group is in a great position to cash in on investor interest in commodities. With its shares inexplicably lagging behind its peers, CME Group belongs on your watchlist of promising companies to research further.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.