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
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
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.
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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.
