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Is Morgan Stanley the Perfect Stock?

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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 (NYSE: 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.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 1.8% Fail
  1-year revenue growth > 12% (0.3%) Fail
Margins Gross margin > 35% 95.1% Pass
  Net margin > 15% 9.9% Fail
Balance sheet Debt to equity < 50% 664.9% Fail
  Current ratio > 1.3 1.59 Pass
Opportunities Return on equity > 15% 7% Fail
Valuation Normalized P/E < 20 8.20 Pass
Dividends Current yield > 2% 1.1% Fail
  5-year dividend growth > 10% (28.6%) Fail
       
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

Morgan Stanleydoesn't pop off the page with a score of three. The broker has gone through a lot in the past five years, and it's unclear whether the future is any more certain with potential new financial crises appearing around the world.

We all know too well what happened to Morgan Stanley and its Wall Street peers three years ago, during the financial crisis that caused one of the biggest declines for the U.S. stock market in history. But even with that period firmly behind us, investors don't seem to have much confidence in investment banks. Goldman Sachs (NYSE: GS  ) , Citigroup (NYSE: C  ) , and Bank of America (NYSE: BAC  ) have all seen their investment banking businesses reel from new capital requirements and the attendant limits on leverage. Without as much leverage, Morgan Stanley can't get the returns on equity that investors are used to.

One piece of good news is that insiders at Morgan Stanley have bought shares recently. Given how cheap the shares are right now, those moves may well be for a short-term pop rather than as a vote of confidence in the company's long-term future.

Meanwhile, those looking for Morgan Stanley to get closer to perfection may well be disappointed. Unless unexpected liberalization of Wall Street reverses the recent trend toward greater regulation, stocks like Morgan Stanley will be a tough place to make money over the long haul.

Keep searching
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 Morgan Stanley to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Citigroup. The Fool owns shares of Bank of America. 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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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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7/25/2014 4:01 PM
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