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.
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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