Is St. Joe the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if St. Joe Company (NYSE: JOE  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 St. Joe.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% (36.1%) Fail
  1-Year Revenue Growth > 12% (29.9%) Fail
Margins Gross Margin > 35% 19.9% Fail
  Net Margin > 15% (92.2%) Fail
Balance Sheet Debt to Equity < 50% 4.4% Pass
  Current Ratio > 1.3 1.99 Pass
Opportunities Return on Equity > 15% (9.4%) Fail
Valuation Normalized P/E < 20 NM Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; St. Joe had negative earnings over the period. Total score = number of passes.

St. Joe only manages to get a score of 2. Given that poor showing, it's surprising that the stock has become the focal point of a huge battle among Wall Street titans.

St. Joe is a real estate developer that has massive land holdings in Florida. Given that the area received a lot of attention during the real estate boom, St. Joe shares soared during the first half of the past decade. Yet just as homebuilders Toll Brothers (NYSE: TOL  ) and PulteGroup (NYSE: PHM  ) experienced, shares topped out in 2005 and began a long, steady decline. As the company's financials show, St. Joe has yet to recover from the bursting of the housing bubble.

What has gotten so much attention lately is the war of words between investing gurus Bruce Berkowitz and David Einhorn. Einhorn made his bearish case at last year's Value Investing Congress, arguing that the company has already sold its best land and that its remaining inventory won't bring in big revenue, forcing the company to burn cash and lose value.

Berkowitz, on the other hand, has responded by acquiring 30% of St. Joe's shares and was said to be perhaps seeking the role of board chairman before abruptly resigning from St. Joe's board of directors earlier this week. He believes that St. Joe's properties have been underdeveloped for years and that new transportation options will make it easier for potential homebuyers to buy from the company.

With the housing market remaining stubbornly weak, neither St. Joe nor similar companies like Consolidated Tomoka (AMEX: CTO  ) and Forestar (NYSE: FOR  ) are likely to see huge rebounds in their stock prices in the near future. Until the Berkowitz/Einhorn battle resolves itself, St. Joe is likely to see fireworks based on the latest moves by the investing gurus.

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.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2011, at 11:23 AM, HardyWeinberg wrote:

    St Joe has been undervalued for decades, ask Marty Whitman. Maybe it's at peak (valley) undervalued now and if it rebounds to its long-term level of undervalued it could be a big relative winner/not-as-much loser?

  • Report this Comment On February 16, 2011, at 12:48 PM, Volition wrote:

    Your article is a bit dated already. Berkowitz resigned from the BOD a few days ago, over disagreements with the board. Additionally, JOE adopted a poison pill defense this week.

  • Report this Comment On February 16, 2011, at 4:57 PM, TMFGalagan wrote:

    @Volition - Thanks for your comment. I've asked my editor to make a minor change reflecting the updated situation, but one thing's for sure: news is likely to come fast and furious on this saga for the foreseeable future.

    best,

    dan (TMF Galagan)

  • Report this Comment On February 17, 2011, at 1:24 PM, Bthascrivener wrote:

    Heard Forestar (FOR) pitched as an opportunity somewhere else on MF today. Love you guys, but once you start giving contradictory advice you become like the big brokerage firms.

  • Report this Comment On February 28, 2011, at 3:22 PM, tsw630 wrote:

    And today, the news changes. Britt Greene, CEO has resigned, and three board members have resigned.

    To replace them, St. Joe will add four new directors proposed by mutual fund Fairholme. That includes Fairholme President Bruce Berkowitz, executive Charles Fernandez, former Florida Gov. Charlie Crist and Carnival Corp. COO Howard Frank. The other three members are Hugh Durden, Thomas Fanning, and Delores Kesler.

    It's not settled out yet.

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