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 Jefferies Group (NYSE: JEF ) 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 Jefferies Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||14.4%||Fail|
|1-Year Revenue Growth > 12%||13.8%*||Pass|
|Margins||Gross Margin > 35%||95.4%||Pass|
|Net Margin > 15%||11.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||580.1%||Fail|
|Current Ratio > 1.3||1.17||Fail|
|Opportunities||Return on Equity > 15%||10.8%**||Fail|
|Valuation||Normalized P/E < 20||9.14||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||(3.8%)||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *Trailing-12-month comparison includes one month of overlap due to fiscal-year change. **Average of figures for previous four quarters.
With a score of 4, Jefferies Group still has some work to do. The investment bank looked promising until very recently, but now the company is facing the fight of its life on concerns about its viability going forward.
Jefferies has been around for quite a while as a mid-sized investment banking firm. Until the financial crisis, it stood in the shadows of Citigroup (NYSE: C ) , Morgan Stanley (NYSE: MS ) , and other huge Wall Street investment banks. But when the crisis hit and many of those giants suffered from the weight of toxic assets, Jefferies was ready to pick up the pieces, having avoided that bad exposure. That potential is likely what attracted Leucadia National (NYSE: LUK ) to take a 26% stake in the company.
But after the recent failure of MF Global, concerned investors turned their attention to Jefferies, apparently due to fears that it was overly exposed to the European sovereign debt crisis. Since then, Jefferies has taken extraordinary measures to defend itself, including revealing extremely detailed information about its holdings in an attempt to disclose fully its lack of risk in Europe.
It's interesting that while Bank of America (NYSE: BAC ) , Goldman Sachs (NYSE: GS ) , and JPMorgan Chase (NYSE: JPM ) have all admitted to having far greater exposure to Italian debt -- the latest focal point for sovereign debt woes -- it's Jefferies that's taking most of the heat. Most recently, the firm disclosed that it was modestly invested net-short against Europe -- meaning it would make money from further problems.
Jefferies stock jumped last week as its bonds traded higher, with investors getting more comfort about its prospects. If the investment bank can survive this crisis of confidence, then it should be able to recover much of the ground it lost recently. But the risk of a self-fulfilling prophecy among scared investors makes this a risky investment.
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."