Has Jefferies Group Become the Perfect Stock?

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.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

12.6%

Fail

 

1-year revenue growth > 12%

(1.8%)

Fail

Margins

Gross margin > 35%

95.4%

Pass

 

Net margin > 15%

9.5%

Fail

Balance sheet

Debt to equity < 50%

435.6%

Fail

 

Current ratio > 1.3

0.81

Fail

Opportunities

Return on equity > 15%

8%

Fail

Valuation

Normalized P/E < 20

16.46

Pass

Dividends

Current yield > 2%

1.7%

Fail

 

5-year dividend growth > 10%

(9.7%)

Fail

       
 

Total score

 

2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Jefferies Group last year, the company has seen its score cut in half, as stagnant revenue during the past 12 months slowed its sales growth. The stock, though, has soared, rising more than 40% over the past year.

It's been a great year for Jefferies. After concerns in 2011 that the company was overly exposed to the European financial crisis, Jefferies did everything in its power to dispel fears. Its best weapon was achieving solid financial results, especially in last year's fourth quarter right after the MF Global scandal.

Interestingly, Jefferies got a chance to shine later in the year, as market-maker Knight Capital Group (NYSE: KCG  ) found itself on the ropes after a devastating trading loss. Along with several other financial firms, including TD Ameritrade (NYSE: AMTD  ) and Stifel Financial (NYSE: SF  ) , Jefferies helped provide a total of $440 million in capital to keep Knight Capital afloat. The deal gave Jefferies and its fellow investors convertible preferred shares that allow them to convert to common stock at $1.50 per share, well below Knight Capital's current share price above $3.

Last month, Jefferies announced that major shareholder Leucadia (NYSE: LUK  ) would buy the entire company in an all-stock deal. Under the buyout, Jefferies shareholders will receive 0.81 shares of Leucadia stock for each Jefferies share they own. Given that Leucadia already owned nearly 30% of Jefferies, the buyout simply formalizes what has already been a strong relationship.

As a result of the merger, which is scheduled to close in early 2013, Jefferies won't have the opportunity to improve as an independent entity. Interested investors should give Leucadia a closer look, however, given that Jefferies will be Leucadia's largest business unit after the deal closes.

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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Click here to add Jefferies Group to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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