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 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 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 CME Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||24.7%||Pass|
|1-Year Revenue Growth > 12%||9.2%||Fail|
|Margins||Gross Margin > 35%||82.9%||Pass|
|Net Margin > 15%||55.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||9.7%||Pass|
|Current Ratio > 1.3||1.14||Fail|
|Opportunities||Return on Equity > 15%||8.7%||Fail|
|Valuation||Normalized P/E < 20||16.04||Pass|
|Dividends||Current Yield > 2%||3.1%||Pass|
|5-Year Dividend Growth > 10%||17.3%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at CME Group last year, the stock has kept its seven-point score. A big boost in its dividend helped offset slower growth for the futures and options exchange, which is at the center of a nasty controversy.
CME Group runs the biggest futures exchange and clearinghouse in the world. Most of its volume comes from interest rate and stock futures, but it also has plenty of hard commodity exposure as well. Although it faces plenty of competition from rivals NYSE Euronext (NYSE: NYX ) and IntercontinentalExchange (NYSE: ICE ) , CME claims to have taken market share from them during 2011.
The big concern, though, is that CME's role in the MF Global scandal may challenge its success. With MF Global clients having lost money, the futures customers that CME depends on are questioning what value a clearinghouse has if it doesn't have a tight enough grip on funds involved to protect them from losses. CME offered a $550 million guarantee to try to facilitate getting customers their money back, but even if CME can get custodian JPMorgan Chase (NYSE: JPM ) to take some responsibility for the improper money movements, the damage to CME's reputation may already be irreversible.
Still, investor interest in investments beyond stocks and bonds has risen. That's created growth both for CME and for options exchange CBOE Holdings (Nasdaq: CBOE ) , which similarly gives investors choices beyond traditional investments. If CME can survive the MF Global episode unscathed, then a resumption of growth could put it in a position to grab up the final points it needs to reach perfection.
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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