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 Franklin Resources
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:
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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.
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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.
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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.
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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.
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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 Franklin Resources.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 6.5% | Fail |
| 1-Year Revenue Growth > 12% | 34.2% | Pass | |
| Margins | Gross Margin > 35% | 44.6% | Pass |
| Net Margin > 15% | 25.8% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 27.1% | Pass |
| Current Ratio > 1.3 | 6.88 | Pass | |
| Opportunities | Return on Equity > 15% | 20.7% | Pass |
| Valuation | Normalized P/E < 20 | 19.34 | Pass |
| Dividends | Current Yield > 2% | 0.8% | Fail |
| 5-Year Dividend Growth > 10% | 16.7% | Pass | |
| Total Score | 8 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 8, Franklin Resources falls just short of perfection. The money manager proves that sometimes, investing in the companies that run mutual funds can be even smarter than investing in the funds themselves.
Like many in the fund industry, Franklin Resources, which runs the Franklin, Templeton, and Mutual Series fund groups, have posted good results recently. The company reported earnings for last quarter that were far better than expected, and while T. Rowe Price Group
Franklin puts together an attractive combination of traits right now. Even though it didn't manage as big a beat over expectations as Janus Capital
One area of concern from Franklin is the muni bond market, where it has a strong presence. Big outflows in the wake of analyst Meredith Whitney's call for 50 to 100 muni defaults could have an impact on revenue, especially if investors reallocate capital outside the fund company's universe of other offerings.
For now, though, the return of mainstream investors to the stock market following its two-year bull run is good news for fund companies generally, and Franklin in particular. With some help from the market and a higher dividend, Franklin Resources could easily become a perfect stock for investors.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.
