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 Piper Jaffray (NYSE: PJC ) 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 Piper Jaffray.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(1.6%)||Fail|
|1-Year Revenue Growth > 12%||(13.4%)||Fail|
|Margins||Gross Margin > 35%||91.5%||Pass|
|Net Margin > 15%||(22.4%)||Fail|
|Balance Sheet||Debt to Equity < 50%||52.8%||Fail|
|Current Ratio > 1.3||1.62||Pass|
|Opportunities||Return on Equity > 15%||(12.8%)||Fail|
|Valuation||Normalized P/E < 20||20.24||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Piper Jaffray last year, the stock has seen its score cut in half. A big drop in sales and profitability in the past year accounted for the decline at the investment bank.
As an investment bank, Piper Jaffray offers investment advice as well as brokerage and asset management services. Unlike discount broker E*TRADE Financial (Nasdaq: ETFC ) , whose primary focus is on individual customers, Piper primarily offers its services to large institutional investors. That segment attracts plenty of big names, but as a spinoff of US Bancorp (NYSE: USB ) , Piper tries to differentiate itself as a non-Wall Street player serving the middle-market more directly.
Piper Jaffray has faced a challenging environment lately. The company has missed expectations on earnings in each of the past two quarters, with a bad miss in the third quarter leading to an unexpected loss. Margins in particular have taken a big hit over time.
But Piper might get at least a small boost from getting to participate in the Facebook IPO. Although JPMorgan Chase (NYSE: JPM ) and Goldman Sachs (NYSE: GS ) were among the original underwriters named for the offering, Facebook added 25 new underwriters earlier this month to maximize its chances of success.
For Piper Jaffray to start moving in the right direction, it needs to find a way to boost revenue. With intense competition and overall negative sentiment toward financial firms generally, that could be an uphill battle.
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 the best investments from the rest.
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